Markov switching causality and the money–output relationship
Article first published online: 27 JUL 2005
Copyright © 2005 John Wiley & Sons, Ltd.
Journal of Applied Econometrics
Volume 20, Issue 5, pages 665–683, July/August 2005
How to Cite
Psaradakis, Z., Ravn, M. O. and Sola, M. (2005), Markov switching causality and the money–output relationship. J. Appl. Econ., 20: 665–683. doi: 10.1002/jae.819
- Issue published online: 27 JUL 2005
- Article first published online: 27 JUL 2005
- Manuscript Revised: 3 AUG 2004
- Manuscript Received: 23 MAR 2004
- UK Economic and Social Research Council. Grant Number: L138251003.
The causal link between monetary variables and output is one of the most studied issues in macroeconomics. One puzzle from this literature is that the results of causality tests appear to be sensitive with respect to the sample period that one considers. As a way of overcoming this difficulty, we propose a method for analysing Granger causality which is based on a vector autoregressive model with time-varying parameters. We model parameter time-variation so as to reflect changes in Granger causality, and assume that these changes are stochastic and governed by an unobservable Markov chain. When applied to US data, our methodology allows us to reconcile previous puzzling differences in the outcome of conventional tests for money–output causality. Copyright © 2005 John Wiley & Sons, Ltd.