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

49 Pages Posted: 1 Sep 2018

See all articles by Shuping Shi

Shuping Shi

Macquarie University

Stan Hurn

Queensland University of Technology - School of Economics and Finance

Peter C. B. Phillips

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

Multiple version iconThere are 2 versions of this paper

Date Written: June 6, 2018

Abstract

This paper re-examines changes in the causal link between money and income in the United States 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 rolling window algorithm and a recursive evolving 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. Bootstrap methods are developed to control family-wise size in the implementation of the recursive testing algorithms. The results from a suite of simulation experiments suggest that the recursive evolving window algorithm provides the most reliable results, followed by the rolling window method. The forward expanding window procedure is shown to have the worst performance. Both the rolling window and recursive evolving approaches find evidence of Granger causality running from money to income during the Volcker period in the 1980s. The forward algorithm does not find any evidence of causality over the entire sample period.

Keywords: Time-varying Granger causality, Subsample Wald tests, Money-income causality

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, 2018). Macquarie University Faculty of Business & Economics Research Paper, Available at SSRN: https://ssrn.com/abstract=3237213 or http://dx.doi.org/10.2139/ssrn.3237213

Shuping Shi (Contact Author)

Macquarie University ( email )

Macquarie University
Sydney, NSW 2109
Australia

HOME PAGE: http://https://sites.google.com/site/shupingshi/home/

Stan Hurn

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

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Peter C. B. Phillips

University of Auckland Business School ( email )

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Yale University - Cowles Foundation ( email )

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Singapore Management University - School of Economics

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