Statistics- I need to run Granger test(hope thats how you spell it)?

Question

I have a model, in order to deal with possible simoultanious variables I was asked to run Granger test.
How do i do it in Stata(what is the command) , do i have to change the variables in some way, and what will the result give me, meaning, what does this test mean...
thanks alot in advance

Answer 1

Granger causality is a technique for determining whether one time series is useful in forecasting another. Ordinarily, regressions reflect "mere" correlations, but Clive Granger, who won a Nobel Prize in Economics, argued that there is an interpretation of a set of tests as revealing something about causality.

A time series X is said to Granger-cause Y if it can be shown, usually through a series of F-tests on lagged values of X (and with lagged values of Y also known), that those X values provide statistically significant information on future values of Y.

The test works by first doing a regression of ΔY on lagged values of ΔY. Once the appropriate lag interval for Y is proved significant (t-stat or p-value), subsequent regressions for lagged levels of ΔX are performed and added to the regression provided that they 1) are significant in and of themselves and 2) add explanatory power to the model. This can be repeated for multiple ΔX's (with each ΔX being tested independently of other ΔX's, but in conjunction with the proven lag level of ΔY). More than 1 lag level of a variable can be included in the final regression model, provided it is statistically significant and provides explanatory power.

The researcher is often looking for a clear story, such as X granger-causes Y but not the other way around. In the real world, often, difficult results are found such as neither granger-causes the other, or that each granger-causes the other.