Granger Causality, Exogeneity, Cointegration, and Economic Policy Analysis

36 Pages Posted: 30 Nov 2012

See all articles by Davide Pettenuzzo

Davide Pettenuzzo

Brandeis University - International Business School

Halbert L. White, Jr.

University of California, San Diego (UCSD) - Department of Economics

Date Written: October 31, 2011

Abstract

Policy analysis had long been a main interest of Clive Granger’s. Here, we present a framework for economic policy analysis that provides a novel integration of several fundamental concepts at the heart of Granger’s contributions to time-series analysis. We work with a dynamic structural system analyzed by White and Lu (2010) with well de…ned causal meaning; under suitable conditional exogeneity restrictions, Granger causality coincides with this structural notion. The system contains target and control subsystems, with possibly integrated or cointegrated behavior. We ensure the invariance of the target subsystem to policy interventions using an explicitly causal partial equilibrium recursivity condition. Policy effectiveness is ensured by another explicit causality condition. These properties only involve the data generating process; models play a subsidiary role. Our framework thus complements that of of Ericsson, Hendry, and Mizon (1998) (EHM) by providing conditions for policy analysis alternative to weak, strong, and super-exogeneity. This makes possible policy analysis for systems that may fail EHM’s conditions. It also facilitates analysis of the cointegrating properties of systems subject to policymaker control. We discuss a variety of practical procedures useful for analyzing such systems and illustrate with an application to a simple model of the U.S. macroeconomy.

Suggested Citation

Pettenuzzo, Davide and White, Halbert L., Granger Causality, Exogeneity, Cointegration, and Economic Policy Analysis (October 31, 2011). Available at SSRN: https://ssrn.com/abstract=2182749 or http://dx.doi.org/10.2139/ssrn.2182749

Davide Pettenuzzo (Contact Author)

Brandeis University - International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States

Halbert L. White

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
La Jolla, CA 92093-0508
United States
858-534-3502 (Phone)
858-534-7040 (Fax)

HOME PAGE: http://www.econ.ucsd.edu/~mbacci/white/

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