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Testing for Granger (non)-Causality in a Time Varying Coefficient VAR Model

Dimitris Christopoulos () and Miguel Leon-Ledesma ()

Studies in Economics from School of Economics, University of Kent

Abstract: In this paper we propose Granger (non-)causality tests based on a VAR model allowing for time-varying coefficients. The functional form of the time-varying coefficients is a Logistic Smooth Transition Autoregressive (LSTAR) model using time as the transition variable. The model allows for testing Granger non-causality when the VAR is subject to a smooth break in the coefficients of the Granger causal variables. The proposed test then is applied to the money-output relationship using quarterly US data for the period 1952:2-2002:4. We find that causality from money to output becomes stronger after 1978:4 and the model is shown to have a good out of sample forecasting performance for output relative to a linear VAR model.

Keywords: Granger causality; Time-varying coefficients; LSTAR models (search for similar items in EconPapers)
JEL-codes: C51 C52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm and nep-ets
Date: 2008-01
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