| Norman R. Swanson, Texas A & M University |
| An Out of Sample Test for Granger Causality |
| Session: C-3-5 Saturday 12 August 2000 by Swanson, Norman R. |
| Granger (1980) summarizes his personal viewpoint on testing for causality, and outlines what he considers to be a useful operational version of his original definition of causality (Granger (1969)), which he notes was partially alluded to in Wiener (1958). This operational version is based on a comparison of the 1-step ahead predictive ability of competing models. However, Granger concludes his discussion by noting that it is common practice to test for Granger causality using in-sample F-tests. The practice of using in-sample type Granger causality tests continues to be prevalent. In this paper we develop simple (nonlinear) out-of-sample predictive ability tests of the Granger non-causality null hypothesis. In addition, Monte Carlo experiments are used to investigate the finite sample properites of the test. An empirical illustration shows that the choice of in-sample versus out-of-sample Granger causality tests can crucially affect the conclusions about the predictive content of money for output. |
| Submitted paper full-text in .pdf |