Causal Change Detection in Possibly Integrated Systems: Revisiting the Money-Income Relationship

59 Pages Posted: 8 Dec 2016

See all articles by Shuping Shi

Shuping Shi

Department of Economics, Macquarie University

Stan Hurn

Queensland University of Technology - School of Economics and Finance

Peter C. B. Phillips

Yale University - Cowles Foundation; University of Auckland; University of Southampton; Singapore Management University - School of Economics

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Date Written: June 6, 2016

Abstract

This paper re-examines changes in the causal link between money and income in the United States for over the past half century (1959-2014). Three methods for the data-driven discovery of change points in causal relationships are proposed, all of which can be implemented without prior detrending of the data. These methods are a forward recursive algorithm, a recursive rolling algorithm and the rolling window algorithm all of which utilize subsample tests of Granger causality within a lag-augmented vector autoregressive framework. The limit distributions for these subsample Wald tests are provided. The results from a suite of simulation experiments suggest that the rolling window algorithm provides the most reliable results, followed by the recursive rolling method. The forward expanding window procedure is shown to have worst performance. All three approaches find evidence of money-income causality during the Volcker period in the 1980s. The rolling and recursive rolling algorithms detect two additional causality episodes: the turbulent period of late 1960s and the starting period of the subprime mortgage crisis in 2007.

Keywords: Time-varying Granger causality, subsample Wald tests, Money-Income

JEL Classification: C12, C15, C32, E47

Suggested Citation

Shi, Shuping and Hurn, Stan and Phillips, Peter C. B., Causal Change Detection in Possibly Integrated Systems: Revisiting the Money-Income Relationship (June 6, 2016). Cowles Foundation Discussion Paper No. 2059. Available at SSRN: https://ssrn.com/abstract=2881983 or http://dx.doi.org/10.2139/ssrn.2881983

Shuping Shi

Department of Economics, Macquarie University ( email )

New South Wales 2109
Australia

Stan Hurn

Queensland University of Technology - School of Economics and Finance ( email )

GPO Box 2434
2 George Street
Brisbane, Queensland 4001
Australia
+61 7 3864 5066 (Phone)
+61 7 3864 1500 (Fax)

Peter C. B. Phillips (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3695 (Phone)
203-432-5429 (Fax)

University of Auckland ( email )

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Com. A room: 102
Auckland
New Zealand
+64 9 373 7599 x7596 (Phone)

University of Southampton

Southampton, SO17 1BJ
United Kingdom

Singapore Management University - School of Economics

90 Stamford Road
178903
Singapore

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