Evidence Of Granger Causality Research Articles

The relationship between energy prices, economic growth and renewable energy consumption: Evidence from Europe

This paper revisits the renewable energy-economic growth nexus in seven European countries for the 34-year period of 1985–2018. As the data is in annual frequency, panel data methodologies are employed to benefit from increased explanatory power of the econometric analysis. Electricity generation share weighted price indexes of coal and natural gas are included in a demand specification together with real GDP in explaining renewable energy consumption. Long-run causality is found to flow from all three explanatory variables to renewable energy consumption. Short-run causality is also detected from the two fossil fuel prices to renewable energy consumption. Our results provide empirical support to the important role of economic growth and non-renewable energy prices in the renewable energy transition. On the other hand, renewable energy consumption, capital and labour enter a production equation in determining economic output. The findings show no evidence of Granger causality from renewable energy consumption to economic output.

Perspectives of globalization and tourism as drivers of ecological footprint in top 10 destination economies.

Beyond the anticipated experience associated with tourism destinations, the United Nations World Tourism Organization (UNWTO) has further tasked (especially the destination countries) on the importance of tourism to achieving the 2030 Sustainable Development Goals (SDGs). From this dimension, this study employed the ecological footprint of the 10 most visited countries (France, Spain, United States, China, Italy, Mexico, United Kingdom, Turkey, Germany, and Thailand) over the period 1995-2016. Specifically, the study employed an econometric approach and found that increase in tourism arrivals and globalization is detrimental to the attainment of sustainable environmental quality in a long term. Precisely, a 1% increase in international arrivals and globalization is responsible for a 0.18 and 0.89% increase in ecological footprint in the long-run. These impacts of tourism activities and globalization are detrimental to the environmental quality of the destination countries. Meanwhile, the real income per capita and biocapacity in the destination countries improve the environmental quality of the panel of destination countries in the long-run. In addition, the study found significant evidence of Granger causality from tourism and real income to ecological footprint without feedback, the globalization-ecological footprint Granger causality nexus is with feedback. Moreover, potentially effective policies for government and other stakeholders especially toward attaining Global goals were proffered in the study.

The military expenditures and economic growth nexus: Panel bootstrap granger causality evidence from NATO countries

The purpose of this study is to examine the causal linkage between military expenditures and economic growth in 27 North Atlantic Treaty Organization (NATO) member countries. Different periods are studied due to the unavailability of data for the common period for all countries. Both the symmetric and the asymmetric causality between military expenditures and economic growth are investigated under cross-sectional dependence and panel heterogeneity by using the bootstrap panel Granger causality testing approach. The results indicate that there is both symmetric and asymmetric Granger-causality between military expenditures and economic growth, which vary from one country to another. The robust empirical findings support the military expenditures and economic growth nexus in 12 of the 27 NATO member countries. Moreover, the findings show that more empirical evidence between military expenditures and economic growth can be obtained when the asymmetric causality is considered, in addition to the symmetric causality.

Risk premia and the European government bond market: new empirical evidence and some thoughts from the perspective of the life insurance industry

We study yield spreads between government bonds in the European Monetary Union. This segment of the global fixed income market is of particular importance for insurance companies in Europe. Our empirical research strategy is inspired by Gunay (2020) who has analyzed the relationship between credit and liquidity risk in the United States using Granger causality tests. More specifically, we employ the procedure developed by Toda and Yamamoto (1995) to test for Granger causality among yield spreads in five different member countries of the European Monetary Union (namely Austria, Belgium, France, Italy and Ireland) relative to Germany. We examine interest rate data from bonds with three different maturities (5, 10 and 30 years). Given the importance of long-term bonds as asset class for European life insurers and pension funds, the empirical results from the often ignored market for government bonds with a maturity of 30 years should be of interest. With regard to long-term sovereign debt, there is no evidence for Granger causality among the time series examined here. Consequently, the risk premia required by investors to hold government bonds of one specific member country of the EMU do not help to forecast the risk premia that have to be paid by other countries. Given the structure of their liabilities, this empirical finding should be of high relevance for portfolio and risk managers in the European life insurance industry and in pension funds. With regard to the yield spreads to be observed in the market for 10-year government bonds, there seems to be no clear picture. Focusing on fixed income securities with a maturity of 5 years, there is one very interesting empirical finding. The test results reported here seem to imply that there is unidirectional Granger causality running from the yield spreads in all other four countries to Austria. Given that Austria is a comparably small country which is assumed to be in a fiscally stable position, this result could be interpreted as evidence for credit risk premia as being helpful to forecast liquidity risk premia in the market for medium-term government bonds issued by member states of the European Monetary Union.

Clean energy development in the United States amidst augmented socioeconomic aspects and country-specific policies

The drive toward the attainment of sustainable environment globally through clean energy development or energy efficiency is not more desirable than in the 21st century, thus the existential policy moderations of economic, trade and security mechanisms. On this premise, and foremost in the literature, the current study examined the country-specific (for the United States) and the driving impacts of economic policy uncertainty, trade policy and national security on the development of cleaner energy sources by using quarterly frequency time series data for period 1990:Q1-2018:Q2. By employing economic expansion as additional factor, the study implemented the Autoregressive Distributed Lag Bounds Testing approach to reveal interesting results: (1) there is a significant evidence that economic expansion, economic policy uncertainty (EU), trade policy (TP), and national security (NS) exhibits long term properties in common, (2) the increase in economic expansion and NS effectiveness significantly yields more cleaner energy development, and (3) a more tightened TP and high EU are statistically significant and detrimental to the development of clean energy. The Granger causality evidence substantiates the role economic expansion, TP, EU and national security in renewable energy development. Generally, the study posits cleaner and energy efficiency policy directive for policymakers in the United States and other countries of interest from the framework of climate action and sustainable development.

The relation between petroleum product prices and crude oil prices

We present an empirical examination of the relation between real spot Brent oil prices and real spot petroleum product prices, specifically gasoline and heating oil prices. Based upon weekly price data spanning a 30-year period ending in April 2019, we provide consistent evidence of Granger causality running from oil prices to product prices accounting for both non-stationarity of the series, and separately conditional heteroskedasticity. No evidence of Granger causality from product prices to oil prices is found for the full sample period nor the period up to the end of 2005, but evidence that gasoline prices Granger-caused oil prices is found for post-2005. Similar results are found for an extended model that also includes potentially endogenous real market variables related to supply and demand in the oil, heating oil and gasoline markets. Given the reduced form model results that oil prices Granger-cause gasoline and heating oil prices, we specify and estimate recursively identified structural vector autoregressive models that specifically account for structural supply and demand shocks in the oil market as well as the petroleum product markets. The oil market block follows Kilian (2009). We find that real spot gasoline prices and real heating oil prices do not respond to structural oil supply shocks, respond transiently to global commodity demand shocks, but do respond to oil-specific demand shocks. We conclude the result that spot oil prices Granger-cause spot gasoline and heating oil prices largely occurs through the channel of oil-specific demand shocks.

Unveiling the causal relationships among banking competition, stock and insurance market development, and economic growth in Europe

There have been major reforms of the financial system within Europe over the past two decades. These reforms were initiated to enhance the competitiveness and sustainable economic growth of economies in this region. This paper investigates the inter-relationships between the reforms undertaken in the financial sector (banking sector, stock market, and insurance industries) and economic growth in Europe. More specifically, this study examines whether there are Granger causal relationships between banking competition, stock-market development, insurance market development, and economic growth, using a panel dataset covering European countries over the period from 1996 to 2016. Utilizing a multivariate framework, the study's results show that all the variables are cointegrated. The findings reveal a network of Granger causal associates between the variables, including short-run bidirectional causality between stock market development and insurance market development. In the long run, there is compelling evidence of Granger causality from banking competition, insurance market development, and stock market development to economic growth. The results provide valuable insights into the types of financial sector reforms that will enhance sustainable economic growth in Europe.

Pollutant emission effect of tourism, real income, energy utilization, and urbanization in OECD countries: a panel quantile approach.

Although the Organization for Economic Co-operation and Development (OECD) member countries are largely regarded as a high human development index and high-income economies, evidence has continued to reveal the existential gap among the member countries drive toward achieving environmental sustainability. Giving this motivation, this research employed a panel quantile approach to examine the role of square of per capita income (the environmental Kuznets curve-EKC hypothesis) and per capita income, tourist arrivals, energy consumption, and urbanization on environmental quality in the panel of (31) selected OECD countries over the period 1995-2016. A handful of vital results were presented in the study. First, the evidence of EKC (inverted U-shaped) proposition is establish just for the lower quantiles while a no EKC (U-shaped) hypothesis is found from the 0.25th to 0.90th quantile. In specific, environmental quality starts to improve when the per capita real income peaked at 11, 271.13 USD (0.05th quantile) and 8, 604.15 USD (0.10th quantile) while the environment becomes damaged after income per capita becomes 89, 321.72 USD (0.25th quantile) and 36, 315.50 USD (0.50th quantile). Moreover, the effect of international tourism arrivals, urbanization, and energy consumption are all significant and damaging to environmental quality across the quantile but with a slightly minimized impact toward the upper quantile. Furthermore, there is statistical significant evidence of Granger causality at least from tourism development, energy consumption, urbanization, and per capita income to carbon emissions. Considering the aforementioned results, the study outlined relevant policy mechanism that is poised to guide the OECD member countries on the sustainable development path.

Financial distress and real economic activity in Lithuania: a Granger causality test based on mixed-frequency VAR

In this paper, we extend the monthly financial stress index for Lithuania, computed by the European Central Bank, to a daily frequency and we also include banking sector stress among its constituents, beyond bond, equity and foreign exchange markets. We investigate the causal relationship between the daily financial stress index and monthly industrial production growth, using a Granger causality test applied to a mixed-frequency VAR. Our results suggest evidence of Granger causality from financial stress to industrial production growth once the index is enriched by daily observations from the financial markets. Our findings, based on impulse response analysis, confirm the negative effect of financial stress on real economy found in the empirical literature through common frequency analysis. Finally, the comparison between common and mixed frequency analysis suggests that ignoring the information content of daily data would lead to a mild temporal aggregation bias that could affect the evaluation of financial stress shocks on industrial production.

The causal relationship between agricultural production, economic growth, and energy consumption in Ghana

Relevance. Transition to a low-carbon economy in order to effectively and efficiently exploit the natural resource base of a country is a daunting task, especially for developing countries due to their over-reliance on climate factors. This study focuses on the case of Ghana and assesses the impact of several indicators – agricultural production, economic growth and energy consumption – on the environment. Research objectives. The aim of the study is to describe the causal relationship between agriculture production, economic growth, energy consumption and environmental degradation. Data and Methods. Using time-series data from 1975 to 2014, the study employed the ARDL model to achieve its objectives. Results. The empirical results from the bounds test provide evidence of a long-run association when the covariates are regressed on environmental degradation. The significance of the error correction term at 1% level of significance confirms this assertion. The result further shows that there is evidence of a unidirectional short-run Granger causality and a bidirectional Granger causality among the variables. There was, however, no evidence of Granger causality between economic growth, livestock production index, crop production index and environmental degradation. Conclusion. It is recommended that policy makers should prioritize the adoption of environmentally friendly technologies both in the crop and livestock sub-sectors to ensure that while the food needs of citizens are met, environmental quality is not compromised. Moreover, it is important to ensure energy use efficiency in production.

Summary of the Paper Entitled: Forecasting Fuel Prices with the Chilean Exchange Rate

This draft is a summary of the paper entitled: Forecasting Fuel Prices with the Chilean Exchange Rate. In that paper we show that the Chilean exchange rate has the ability to predict the returns of oil prices and of three additional oil-related products: gasoline, propane and heating oil. The theoretical underpinnings of our empirical findings rely on the present-value theory for exchange rate determination and on the strong co-movement displayed by some commodity prices. The Chilean economy is heavily influenced by one particular commodity: copper, which represents nearly 50% of total national exports and attracts a similar share in terms of Foreign Direct Investment. As a consequence, the floating Chilean exchange rate is importantly affected by fluctuations in the copper price. As oil-related products display an important co-movement with base metal prices, it is reasonable to expect evidence of Granger causality from the Chilean peso to these oil-related products. We find substantial evidence of predictability both in-sample and out-of-sample. Our paper is part of a growing literature that in the recent years has explored the linkages between commodity prices and commodity currencies.

The pricing efficiency of crude oil futures in the Shanghai International Exchange

We investigate the pricing efficiency of the newly emerged crude oil futures market of the Shanghai International Exchange (INE) from the perspective of cointegration and Granger causality between the returns on INE crude oil futures and some representative spot markets. With a limited sample period, we employ a series of robust statistics and find that the INE crude oil futures’ returns have an equilibrium relationship with the spot returns on the Daqing, Shengli, Oman, WTI, and Brent spot markets. Both imply that the INE crude oil futures price can reflect the fundamental information of spot markets effectively. The evidence of Granger causality is mixed but supports the efficiency of the INE in the Asia-Pacific region.

The role of renewable energy, immigration and real income in environmental sustainability target. Evidence from Europe largest states

In spite of the continued deployment of technologies, innovations toward addressing the challenges of global warming, forecasting and sustaining quality environment have remained the herculean endeavour of the advanced states. Also, being migrants' destinations, resulting from the availability of economic opportunities, the target of attaining low-carbon, energy efficiency, and the cleaner atmospheric environment by these advanced economies is further bewildered. In that light, we investigate the impact of renewable energy consumption and migration on the carbon dioxide emissions of the panel of European Union's largest economies of France, Germany, and the United Kingdom over the period of 1990–2016. The consistency of the group fully modified least square and dynamic ordinary least square presents elasticity of −0.13 and −0.14 respectively for the nexus of renewables and carbon emissions. Similarly, 0.04 and 0.05 are the respective elasticity of the two models for the nexus of migration and carbon emissions. In support of extant literature, the nexus of carbon emissions with gross domestic product and consumer price index are significant, and respectively positive and negative. In addition, the study reveals evidence of Granger causality with feedback between renewable energy consumption and carbon emissions, and between consumer price index and carbon emissions. On the other hand, a unidirectional Granger causality running from migration to carbon emissions is observed. In practical term, the study presents policy frameworks for the examined countries and other advanced nations. The implementation of the presented policy pathways are potentially geared toward a forecastable, sustainable environmental quality and energy efficiency targets.

Investment decision-making under economic policy uncertainty

ABSTRACTIt is widely established that economic policy uncertainty (EPU) affects investment decisions and performance, yet research in this area has overlooked the direct property investment market. This article seeks to rectify this and proposes a multistage multilevel analytical framework to offer new insights and a richness of findings. Using a news-based measure of EPU in the United Kingdom, and controlling for economic conditions, a national-level analysis reveals some evidence of Granger-Causality between EPU and total returns, indicating that pricing is responsive to uncertainty. These findings suggest that EPU is an important risk factor for direct property investments, with pricing implications. Differences in data and performance measure are important, however, with income returns unresponsive. A micro-level investigation begins to reveal some of the asset-pricing decisions underpinning the national results, indicating investors’ concerns for income streams are consistently high, regardless of varying EPU. Pricing can also cause changes in EPU, such as in the retail and industrial markets (increasingly linked through logistics) reflecting sector-specific stakeholder groups and newsworthy issues. This evidence highlights how important it is for policy-makers to understand the complex and bi-directional relationship, that indecision can undermine investment confidence and cause investment market volatility, in turn raising EPU.

Causal Change Detection in Possibly Integrated Systems: Revisiting the Money–Income Relationship*

AbstractThis paper re-examines changes in the causal link between money and income in the United States over the past half century (1959–2014). Three methods for the data-driven discovery of change points in causal relationships are proposed, all of which can be implemented without prior detrending of the data. These methods are a forward recursive algorithm, a rolling window algorithm, and a recursive evolving algorithm all of which utilize subsample tests of Granger causality within a lag-augmented vector autoregressive framework. The limit distributions for these subsample Wald tests are provided. Bootstrap methods are developed to control family-wise size in the implementation of the recursive testing algorithms. The results from a suite of simulation experiments suggest that the recursive evolving window algorithm provides the most reliable results, followed by the rolling window method. The forward expanding window procedure is shown to have the worst performance. Both the rolling window and recursive evolving approaches find evidence of Granger causality running from money to income during the Volcker period in the 1980s. The forward algorithm does not find any evidence of causality over the entire sample period.

Small business lending and credit risk: Granger causality evidence

Because of their opaque nature, SMEs are overly reliant on bank lending. Therefore, we examine whether banks' credit supply to SMEs are affected by their financial conditions. To this end, we employ a Granger causality analysis to examine whether there is an indication of a significant direction of determination between SME lending and non-performing SME loans. The results reveal no bidirectional relationship between SME lending and NPL for the entire banking sector. For Islamic banks, however, we find two-way linkages between these two parameters: a negative causation is running both from SME lending to NPL growth and from NPL to SME lending. Given Islamic banks' deposit-oriented funding practices and their adherence to profit-and-loss sharing principles, this finding suggests the presence of heightened market discipline within the Islamic banking system.

Forecasting Emerging Market Currencies: Are Inflation Expectations Useful?

This paper investigates the empirical relevance of inflation expectations in forecasting exchange rates. To that end, we use an expectation version of purchasing power parity (EVRPPP) based on the differential of inflation expectations derived from inflation-indexed bonds for Brazil, Colombia, Chile, India, Mexico, Poland, South Africa, South Korea and Turkey. Using monthly data on exchange rates and on the inflation expectations, we find that our predictors are not significantly better than the random walk model, although, with the exception of the South Korean Won, they outperform the random walk when considering the sign of the rate of change. We also find strongly support Granger causality running from exchange rate to the forecasts based on EVRPPP and only partial evidence of Granger causality running the other way around. Finally, our results suggest that 1-year, 5-year and 10-year inflation expectations are mutually consistent.

The impact of financial development on economic growth in middle-income countries

Whether an economy can be categorized as middle-income or not is an empirical issue. We apply the World Bank’s standard to divide middle-income economies into trapped middle-income economies and graduated middle-income economies, and compare them with high-income economies. This paper tests how financial system development positively impacts a nation’s economic development among the above-mentioned three groups of economies. We combine models and methodology from previous studies (King and Levine, 1993a; Levine and Zervos, 1998; Rousseau and Wachtel, 2000, 2002; Xu, 2000). Augmenting these models with new measures and relations of financial development, we find that (1) consistent with previous studies, financial development contributes significantly to economic growth through channels of physical capital stock and total factor productivity; (2) there is Granger causality between equity market development and economic growth for all three groups of economies, although some stronger and some weaker; (3) there is a reverse causality between economic growth and equity market development in high-income economies, which is not detected in other economies; (4) strong evidence of Granger causality and feedback between banking system development and inflation is found only in the trapped middle-income economies.

Volatility spillovers between real exchange rate returns and real stock price returns in Malaysia

AbstractThis study analyses volatility spillovers between real exchange rate returns and real stock price returns in Malaysia. The component‐generalized autoregressive conditional heteroskedasticity model with asymmetric effect is used to decompose volatility into permanent or long‐run component and transitory or short‐run component. Permanent and transitory components of volatility are commonly high in the global financial crisis, 2008. The results of the seemingly unrelated regressions framework show that volatility spillovers of permanent component between real exchange rate returns and real stock price returns are stronger than volatility spillovers of transitory component between real exchange rate returns and real stock price returns. Moreover, volatility spillovers of permanent and transitory components between real Malaysian ringgit against the U.S. dollar return and real stock price returns are stronger than real Malaysian ringgit against the Japanese yen exchange rate return and real stock price returns. There is some evidence of Granger causality between real exchange rate returns and real stock price returns. On the whole, there is some evidence of the link between the exchange rate market and the stock market in Malaysia.

IMPACTS OF CRISES ON DYNAMIC LINKAGES BETWEEN FINANCIAL AND CAPITAL MARKETS

This paper studies the cointegration and bivariate causality relationships between capital and financial markets for the seven Asian countries, which were badly hit by the Asian Financial Crisis (AFC). Our empirical results show that, before the AFC, all countries, except the Philippines and Malaysia, experienced no evidence of Granger causality between the exchange rates and the stock prices. However, the appearance of the causality, but not the cointegration, between the capital and financial markets becomes stronger during the AFC period. Surprisingly, after the September 11 terrorist attack (911), the causality relationship between these two markets reverts back to normal as in the pre-AFC period and their cointegration relationship is weakened. From our findings, it can be inferred that: First, AFC has a bigger and more direct impact on the causality relationship between the financial and capital markets in Asia; Second, the 911 basically had no impact on the causality relationship between these two markets; and third, the Asian financial and capital markets have become more mature and efficient after the 911 crisis.