Traditional granger causality (1969;1972) VS Toda and Yamamoto(1995)

Traditional granger causality

Granger (1969) and Sims (1972) proposed a technique which is used commonly for causational
relationship which is known as granger causality. Their approach is crucially based on the saying
that the past and present may cause the future but the future cannot cause the past 1. In
econometrics the most widely used operational definition of causality is the Granger definition of
causality, which is defined as follows: X is a Granger cause of Y (denoted as X-----Y), if
present y can be predicted with better accuracy by using past values of x rather than by not doing
so, other information being identical(2).
Shortcomings of traditional granger causality
According to Guajarati 1995 there are few shortcomings in granger causality like first one is
model specification problem and number of lags, second one drawback of this approach is
spurious regression (non-stationary problem(Huang, Kao et al. 2004).
Toda and Yamamoto (1995)
Toda and Yamamoto (1995) is concerned superior than the traditional granger causality because
of this approach does cure of above shortcomings of traditional granger causality. For testing
Toda Yamamoto we have no need to bind us that our all variables must be stationary at level or
first difference etc. Toda and Yamamoto, granger causality test which is valid irrespective of
whether a series is I(0), I(1) or I(2), non-cointegreted or cointegreted of any uninformed order
(Wolde-Rufael 2005)
Advantage of Toda and Yamamoto (1995)
This approach makes granger causality much easier because of, in this technique researchers
have no need to test cointegration or convert VAR into ECM.
Procedure of Toda and Yamamoto
1) Check unit root to know order of integration between time series
2) Run var model in level form
3) On the base of AIC and SIC select appropriate lags
4) You must sure it that there must not be serial correlation
1

3Granger

2Charemza

(1980).
and Deadman (1992).

5) Now see cointegration with the help of Johnsons test for consistent results. And dont
get confused whatever your results come.
6) Now run var model with suitable lag lengths.
7) Now check granger causality
8) Now see your results on the point of views steps five, cos when we find cointegration
among series, there must be ganger causality also.
Now perform Toda and Yamamoto using Eviews.
Step 1: check sationarity of data

Step 2: chose optimal lags; I found that 6 is optimal lags length.

According to AIC and HQ

five is optimal lags , so as
usually we use AIC so ill
chose five as optimal lag on
the base of AIC..
Ye can zoom it if not clear

Step3: checking for serial correlation, go to view of above resulted window -------residual
tests, autocorrelation, from the blow table you will decide about autocorrelation

Step4: check cointegration, through Johansen's Trace Test and Max. Eigenvalue Test, for
toda yamamota, this doesnt matter either variables are cointegreted or not, but we are
checking for the robustness. Quick ------groups statistic ------Johnson cointegration

Here I found two Cointegrating

equations. If we dont have
Cointegrating equation Toda
Yamamota still work it is not
necessary for toda yamamota
approach that series are must be
cointegreted ,we only check it for
the double check Ill explain it
below.
Step 5: Now Ill run again VAR at level, and just include one extra lag for all variables.
Like below and ok

Here I have add one more lag in

exogenous option , as we know
our optimal lags length was 5 and I
have put 5 lags in lags intervals for
endogenous ,,,,
Again in exogenous variable tab
write your all variables add one
more lag, like our suitable lags were
5 but I wrote -6 with all variables
i.e. one more lag.
Step 6: Results of step 5

Now last step for causational

relation, go to view of this
resulted window----lag
structure---granger causality
/block exogeneity test

Step 7: view----- lag structure--- granger causality and ok

Step 8:

Results of granger causality and u can see gdp granger Couse to

co and we took this decision on the base of probability value,,
Same co gdp and life granger Couse to fdi. I.e. if gdp life
expectancy and Corbin dioxide increase fdi also increase.
And interpret other results same
Note: here you also can see that software automatically
calculate df 5,, as our suitable lags were 5..

Step9: we saw about cointegration and now we also can see that there is granger causality
also exist .for double check I estimated cointegration.

Huang, J.-T., A.-P. Kao, et al. (2004). "The granger causality between economic growth and
income inequality in post-reform china." The International Centre for the Study of East Asian
Development (ICSEAD), Kitakyushu, Japan 4: 34-38.
Toda, H. Y. and T. Yamamoto (1995). "Statistical inference in vector autoregressions with
possibly integrated processes." Journal of econometrics 66(1): 225-250.
Wolde-Rufael, Y. (2005). "Energy demand and economic growth: the African experience."
Journal of Policy Modeling 27(8): 891-903.