Using Zero-non-Zero Patterned Vector Autoregressive Modelling to Test for Causality between Money Supply, GDP Growth, The London Stock Market Index and the Euro Exchange Rate

Abstract

In this paper the techniques of zero-non-zero (ZNZ) patterned vector autoregressive modelling are utilized to examine two issues associated with the European single currency - the euro. First, "Granger causality" is employed to examine the causal linkages between the euro exchange rate, the euro area money supply and the gross domestic product (GDP) growth in the euro area. Second, we examine the hypothesis that the euro has become a major influence on international stock markets by testing for the causal relationships between movements in the euro exchange rate, the U.K. pound exchange rate and the London stock market index.