DepartmentBS(Hons)Economics

Granger causality test

3

Definition:

Xt is said not to Granger-cause Yt if for all h >

o

F(Yt+hSt) = F(yt+hSt − Xt)

where F denotes the conditional distribution

and St− Xt is all the information in

the universe except series Xt. In plain words,

Xt is said to not Granger-cause Yt if

X cannot help predict future Y.

Assumptions:

1…The future cannot cause the past.The past causes the present or future.

2… A cause contains unique information about an effect not available elsewhere.

Method:

Open EviewsSelect (File-New-Workfile)New window with the name of (Work File creat)

will open select option work file structure type dated data.

Select option for data description Annual. Start data…….1979 End data…….2010 Click OK.New work file is creat.Past the data.Click View

and then select the Granger Causality Test and write the lag number and then Click on OK.

Results:

Pairwise Granger Causality Tests Date: 04/10/15 Time: 21:26 Sample: 1979 2010 Lags: 3Null Hypothesis obs F-statistic Prob. LCPI does not Granger 29 2.31563

0.1037Cause LPGDP LPGDP does not Granger 1.70853

0.1944Cause LCPI

Interpretation:

LCPI does not Granger Cause LPGDP

This Hypothesis is accept because its probability (0.1037) is greater than 0.05.Its mean that LPGDP Granger Cause LCPI.

LPGDP does not Granger Cause LCPI

This Hypothesis is accept because its probability (0.1944) is greater than 0.05.Its mean that LCPI Granger Cause LPGDP.

References:

1--- www.Economics.com

2---Applied Economics by Esterio and

Stephen G.