Article

Markov switching causality and the money-output relationship

Psaradakis, Z. and Ravn, M.O. and Sola, M. (2005) Markov switching causality and the money-output relationship. Journal of Applied Econometrics, 20 (5). pp. 665-683. ISSN 08837252 DOI:18614
Source: OAI

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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Keywords

analysing Granger causality
 
causal link
 
conventional tests
 
Granger causality
 
macroeconomics
 
monetary variables
 
money-output causality
 
previous puzzling differences
 
studied issues
 
unobservable Markov chain