Causal Paths and Exogeneity Tests in Generalcorr Package for Air Pollution and Monetary Policy

Abstract

Since causal paths are important for all sciences, my package 'generalCorr' provides sophisticated R functions using four orders of stochastic dominance and generalized partial correlation coefficients. A new test (in Version 1.0.3) replaces Hausman-Wu medieval-style diagnosis of endogeneity relying on showing that a dubious cure (instrumental variables) works. An updated weighted index summarizes causal path results from three criteria: (Cr1) lower absolute gradients, (Cr2) lower absolute residuals, both quantified by stochastic dominance of four orders, and (Cr3) from goodness of fit. We illustrate with air-pollution data and causal strength of six variables driving 'excess bond premium,' a good predictor of US recessions.