Economics Asked by Sophie L on January 14, 2021
I am trying to test if $a_t$ granger causes $b_t$:
$$a_t=rho_1+phi_{11}a_{t-1}+alpha_{11}b_{t-1}+beta_{11}c_{t-1}+u_{1t}$$
$$b_t=rho_2+phi_{21}a_{t-1}+alpha_{21}b_{t-1}+beta_{21}c_{t-1}+u_{2t}$$
$$c_t=rho_3+phi_{31}a_{t-1}+alpha_{31}b_{t-1}+phi_{31}c_{t-1}+u_{3t}$$
I am trying to use an F test.
However, should be null be: $phi_{21}$ = 0.
Or do I also need to set: $beta_{21}$ = 0 because a impacts b through c.
This site https://www.statisticshowto.com/granger-causality/ shows about conducting the F-test for granger-causality. It also talks about alternative Tests.
"If you have a large number of variables and lags, your F-test can lose power.
An alternative would be to run a chi-square test, constructed with likelihood ratio or Wald tests. Although both versions give practically the same result, the F-test is much easier to run."
Answered by Mike J on January 14, 2021
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