Short and long run causality measures: theory and inference

Jean-Marie Dufour ()
Authors registered in the RePEc Author Service: Abderrahim Taamouti

UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía

Abstract: The concept of causality introduced by Wiener (1956) and Granger (1969) is defined in terms of predictability one period ahead. This concept can be generalized by considering causality at a given horizon h, and causality up to any given horizon h [Dufour and Renault (1998)]. This generalization is motivated by the fact that, in the presence of an auxiliary variable vector Z, it is possible that a variable Y does not cause variable X at horizon 1, but causes it at horizon h > 1. In this case, there is an indirect causality transmitted by Z. Another related problem consists in measuring the importance of causality between two variables. Existing causality measures have been defined only for the horizon 1 and fail to capture indirect causal effects. This paper proposes a generalization of such measures for any horizon h. We propose nonparametric and parametric measures of unidirectional and instantaneous causality at any horizon h. Parametric measures are defined in the context of autoregressive processes of unknown order and expressed in terms of impulse response coefficients. On noting that causality measures typically involve complex functions of model parameters in VAR and VARMA models, we propose a simple method to evaluate these measures which is based on the simulation of a large sample from the process of interest. We also describe asymptotically valid nonparametric confidence intervals, using a bootstrap technique. Finally, the proposed measures are applied to study causality relations at different horizons between macroeconomic, monetary and financial variables in the U.S. These results show that there is a strong effect of nonborrowed reserves on federal funds rate one month ahead, the effect of real gross domestic product on federal funds rate is economically important for the first three months, the effect of federal funds rate on gross domestic product deflator is economically weak one month ahead, and finally federal fundsrate causes the real gross domestic product until 16 months.

Keywords: Monte; Carlo; Macroeconomics; Money; Interest; rates; Output; Inflation; Granger; causality; Time; series; Indirect; causality; Multiple; horizon; causality; Causality; measure; Predictability; Autoregressive; model; Vector; autoregression; VAR; Bootstrap (search for similar items in EconPapers)
JEL-codes: C1 C12 C15 C32 C51 C53 E3 E4 E52 (search for similar items in EconPapers)
Date: 2008-07
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-ets and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://e-archivo.uc3m.es/rest/api/core/bitstreams ... 324ed9353031/content (application/pdf)

Related works:
Journal Article: Short and long run causality measures: Theory and inference (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:we083720

Access Statistics for this paper

More papers in UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de Economía
Bibliographic data for series maintained by Ana Poveda ().