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Markov switching causality and the money-output relationship

Markov switching causality and the money-output relationship
Markov switching causality and the money-output relationship
The causal link between monetary variables and output is one of the most studied issues in macroeconomics. One puzzle from this literature is that the results of causality tests appear to be sensitive with respect to the sample period that one considers. As a way of overcoming this difficulty, we propose a method for analysing Granger causality which is based on a vector autoregressive model with time-varying parameters. We model parameter time-variation so as to reflect changes in Granger causality, and assume that these changes are stochastic and governed by an unobservable Markov chain. When applied to US data, our methodology allows us to reconcile previous puzzling differences in the outcome of conventional tests for money-output causality.
0883-7252
665-683
Psaradakis, Zacharias
1975d9bd-addc-4f07-80a2-9fa423835408
Ravn, Morten O.
ed259e8b-96c8-48b4-8a82-35df1c541414
Sola, Martin
7826e654-5a2c-4f34-b99b-9fcdf06cc9d3
Psaradakis, Zacharias
1975d9bd-addc-4f07-80a2-9fa423835408
Ravn, Morten O.
ed259e8b-96c8-48b4-8a82-35df1c541414
Sola, Martin
7826e654-5a2c-4f34-b99b-9fcdf06cc9d3

Psaradakis, Zacharias, Ravn, Morten O. and Sola, Martin (2005) Markov switching causality and the money-output relationship. Journal of Applied Econometrics, 20 (5), 665-683. (doi:10.1002/jae.819).

Record type: Article

Abstract

The causal link between monetary variables and output is one of the most studied issues in macroeconomics. One puzzle from this literature is that the results of causality tests appear to be sensitive with respect to the sample period that one considers. As a way of overcoming this difficulty, we propose a method for analysing Granger causality which is based on a vector autoregressive model with time-varying parameters. We model parameter time-variation so as to reflect changes in Granger causality, and assume that these changes are stochastic and governed by an unobservable Markov chain. When applied to US data, our methodology allows us to reconcile previous puzzling differences in the outcome of conventional tests for money-output causality.

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Published date: July 2005

Identifiers

Local EPrints ID: 47647
URI: http://eprints.soton.ac.uk/id/eprint/47647
ISSN: 0883-7252
PURE UUID: d5aeaf8b-fa7a-4a9c-aad5-19b044319471

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Date deposited: 07 Aug 2007
Last modified: 15 Mar 2024 09:34

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Contributors

Author: Zacharias Psaradakis
Author: Morten O. Ravn
Author: Martin Sola

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