The Stability Assumption in Tests of Causality between Money and Income

Helmut Lütkepohl

Empirical Economics, 1989, vol. 14, issue 2, 139-50

Abstract: This note argues that structural stability is an important condition for tests of Granger-causality. Despite this fact the standard causality tests are sometimes appiled to data for which structural stability cannot be assume a priori. Therefore, the stability of GNP/M1 systems of the U.S., Canada, and West Germany in the aftermath of the 1973/74 oil crisis is analyzed using formal statistical tests. Prediction tests are particularly useful for that purpose. The stability of the model for Canadian data is rejected whereas stability is not rejected for the U.S. and West Germany.

Date: 1989
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