PRESENTATION OF ECONOMETRICS

TOPIC GRANGER CAUSALITY TEST SUBMITTED BY QARSAM ILYAS ROLL NO 7

What is causality in economics ?

Correlation: de enden!e o" one #aria$le on ot%er #aria$le& it doe' not ne!e''aril( i) l( !a*'ation+ Ca*'ation: !a*'e and e""e!t relation'%i
E''entiall(& t%e notion o" !a*'alit( in ti)e 'erie' e!ono)etri!' i' $a'ed on , redi!ta$ilit(-+ T%e 'tri!t r*le e) lo(ed i' t%at onl( t%e a't !an redi!t t%e "*t*re $*t not #i!e #er'a+ T%*'& i" A %a en' $e"ore B& it i' not ad)i''i$le t%at B !a*'e' A+ .o/e#er& A !an otentiall( !a*'e' B+

GRANGER CAUSALITY
Gran0er 123435 ro o'ed a ti)e6'erie' data $a'ed a roa!% in order to deter)ine !a*'alit(+ In t%e Gran0er6'en'e 7 i' a !a*'e o" ( i" it i' *'e"*l in "ore!a'tin0 ( + In t%i' "ra)e/or8 -*'e"*l - )ean' t%at 7 i' a$le to in!rea'e t%e a!!*ra!( o" t%e redi!tion o" ( /it% re' e!t to a "ore!a't& !on'iderin0 onl( a't #al*e' +

GRANGER CAUSALITY
Gran0er

!a*'alit(- i' a ter) "or a

' e!i"i! notion o" !a*'alit( in ti)e6 'erie' anal('i': Te) oralit( E7o0eneit( Inde enden!e

E9AMPLE+++++++++++
T%e relation'%i $et/een 'to!8 )ar8et ri!e' and 0ro/t% 1GDP5+ A Gran0er6!a*'alit( anal('i' %a' $een !arried o*t in order to a''e'' /%et%er t%ere i' an( otential redi!ta$ilit( o/er o" one indi!ator "or t%e ot%er+

EQUATIONS
Thus! the "ollo#in$ t#o e%uations can &e s'eci"ie( )

CONTINOUE*
A''*) tion: t%e error ter) i' a''*)ed to $e i+i+d+ /it% )ean :ero and !on'tant #arian!e+ In ti)e 'erie' !onte7t& t%e error ter) )*'t $e 'tationar( or inte0rated o" order ;+ T%i' a''*) tion /ill %old onl( i" $ot% 9 and Y are I1;5 or $ot% are I125 and t%eir linear !o)$ination i' I1;5+ It i' /ell noted t%at )a!roe!ono)i! #aria$le' are I125 ro!e''e' or are non6'tationar(+

Uni(i+ectional G+an$e+, causality "+om S- to G*.i(i+ectional causality

.YPOT.ESIS ABOUT T.E RELATION S.IP BET<EEN GDP AND SP

Uni(i+ectional G+an$e+, causality "+om G*- to SIn(e'en(ence &et#een G*- an( S-

*ATA ANALYSIS
T%e !o*ntr( t%at %a' $een !%o'en "or t%i' e) iri!al te't %a' $een t%e United State'& /it% no)inal #al*e' )ade real t%ro*0% t%e *'e o" t%e I) li!it GDP Pri!e De"lator+

GRA-/ICALLY RELATION .ETWEEN S- AN* G*-

E0-IRICAL ANALYSIS AN* RESULTS

C%e!8 t%e 'tationarit( o" GDP and SP 'erie' T%e A8ai8e 1AIC5 and S!%/ar: In"or)ation Criteria %a#e $een *'ed in order to "ind an a ro riate n*)$er o" la0'+ A"ter t%at t%e'e re=*ire)ent' %a#e $een 'ati'"ied& Gran0er6!a*'alit( te't' are !o) *ted+ Ta8in0 e=*ation 125 a' an e7a) le& t%e t/o 'te ' ro!ed*re in te'tin0 /%et%er SP !a*'e' GDP i' a' "ollo/'+

STEPS+++++++++++++
1 ) G*- is +e$+esse( on its 'ast 2alues e3clu(in$ S- in the +e$+esso+s 4) Thus! a secon( +e$+ession is com'ute( inclu(in$ the la$$e( SThe test statistics is)

RESULTS

RESULTS
The 2alues o" 5 statistic su$$est that S- G+an$e+, causes G*- !an( G*- (oes not cause S- Thus! it can &e a+$ue( that 'ast 2alues o" S- cont+i&ute to the '+e(iction o" the '+esent 2alue o" G*5o+ the e%uation 647 the associate( 5 tests $i2e the o''osite +esult! in "act the+e seems to &e no G+an$e+,Causality "+om 'ast 2alues o" G*- "o+ "utu+e 2alues o" S-

CONCLUSION
G+an$e+ causality is a statistical conce't &ase on '+e(iction I" la$$e( 2alues o" 8 hel' '+e(ict cu++ent 2alues o" Y in a "o+ecast "o+me( "+om la$$e( 2alues o" &oth 8 an( Y then 8 is sai( to G+an$e+ cause Y

An a''lication 9 Which came "i+st 9 the chic:en o+ the e$$?; .ecause sometimes G+an$e+ Causality Is mo+e than co++elation< It=s causation