ON THE RELATIONSHIP BETWEEN IMPULSE-RESPONSE ANALYSIS, INNOVATION ACCOUNTING AND GRANGER CAUSALITY

We derive a general characterization of Granger non-causality between two vectors, X1 and X2, in terms of impulse responses, when a third ve ctor of auxiliary variables, X3, is also used to forecast. It is obser ved that the usual characterizations of non-causality in terms of impu lse responses or variance decompositions can be misleading in such sit uations. A numerical illustration is also provided.