Long‐run Causality, with an Application to International Links Between Long‐term Interest Rates

Abstract

In this paper we give a precise definition of long‐run causality in a multivariate non‐stationary, possibly cointegrated, framework. A variable is said to be causal for another in the long‐run if knowledge of the past of the former improves long‐run predictions of the latter. In a VAR framework, we show that long‐run non‐causality can be easily tested with a Wald statistics, conditionally on the cointegration rank. The methodology is used to study long‐run causal links between US, German, and French long‐term interest rates from January 1990 to June 1997.

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