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Effects of simultaneity on testing Granger-causality – a cautionary note about statistical problems and economic misinterpretations

Joachim Wilde ()

No 93, IEER Working Papers from Institute of Empirical Economic Research, Osnabrueck University

Abstract: Interpreting Granger causality as economic causality implies that the underlying VAR model is a structural economic model. However, this is wrong if simultaneity occurs. Magnitude and stability of possible errors are analysed in a simulation study. It is shown that economic misinterpretations of tests of Granger causality can occur with probability one for realistic parameter values. Furthermore, the power of the test can be rather low even with a sample size of T=50.

Keywords: Granger causality; test; simultaneity; instantaneous causality (search for similar items in EconPapers)
JEL-codes: C32 (search for similar items in EconPapers)
Date: 2012-10-12
New Economics Papers: this item is included in nep-ecm
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