Tuesday, October 25, 2011

VAR or VECM When Testing for Granger Causality?

It never ceases to amaze me that my post titled "How Many Weeks are There in a Year?" is at the top of my all-time hits list! Interestingly, the second-placed post is the one I titled "Testing for Granger Causality". Let's call that one the number one serious post. As with many of my posts, I've received quite a lot of direct emails about that piece on Granger causality testing, in addition to the published comments.

One question that has come up a few times relates to the use of  a VAR model for the levels of the data as the basis for doing the non-causality testing, even when we believe that the series in question may be cointegrated. Why not use a VECM model as the basis for non-causality testing in this case?