Meta-Granger causality testing

Abstract

Understanding the (causal) mechanisms at work is important for formulating evidence-based policy. But evidence from observational studies is often inconclusive with many studies finding conflicting results. In small to moderately sized samples, the outcome of Granger causality testing heavily depends on the lag length chosen for the underlying vector autoregressive (VAR) model. Using the Akaike Information Criterion, there is a tendency to overfit the VAR model and these overfitted models show an increased rate of false-positive findings of Granger causality, leaving empirical economists with substantial uncertainty about the validity of inferences. We propose a meta-regression model that explicitly controls for this overfitting bias and we show by means of simulations that, even if the primary literature is dominated by false-positive findings of Granger causality, the meta-regression model correctly identifies the absence of genuine Granger causality. We apply the suggested model to the large literature that tests for Granger causality between energy consumption and economic output. We do not find evidence for a genuine relation in the selected sample, although excess significance is present. Instead, we find evidence that this excess significance is explained by overfitting bias. Show more