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Measures of Conditional Linear Dependence and Feedback

between Time Series
a
John F. Geweke
a
Department of Economics , Duke University , Durham , NC , 27706 , USA
Published online: 12 Mar 2012.

To cite this article: John F. Geweke (1984) Measures of Conditional Linear Dependence and Feedback between Time Series, Journal of
the American Statistical Association, 79:388, 907-915

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 Measures of Conditional Linear Dependence and
Feedback Between Time Series
JOHN F. GEWEKE*
Measures of linear dependence and feedback for two mul-
tiple time series conditional on a third are defined. The
measure of conditional linear dependence is the sum of
linear feedback from the first to the second conditional
on the third, linear feedback from the second to the first
conditional on the third, and instantaneous linear feed-
back between the first and second series conditional on
the third. The measures are non-negative and may be
expressed in terms of measures of unconditional feedback
between various combinations of the three series. The
measures of conditional linear feedback can be additively
decomposed by frequency. Estimates of these measures
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are straightforward to compute, and their distribution can
be routinely approximated by bootstrap methods. An em-
pirical example involving real output, money, and interest
rates is presented.
KEY WORDS: Bootstrap; Resampling; Macroeconom-
ics; Spectral density.
1. INTRODUCTION
A recent article (Geweke 1982) introduced a decom-
position of variance for multiple time series useful in the
interpretation of macroeconomic time series (Geweke
1983). Based on the limiting values of Gaussian likelihood
ratio statistics, a measure of linear dependence between
multiple time series was defined and additively decom-
posed into two measures of directional linear feedback
and a measure of instantaneous linear feedback. The
measures of directional linear feedback were, in turn, ad-
ditively decomposed by frequency. These measures are
consistent with the measure of information proposed by
Gel’fand and Yaglom (1959) and quantify the definitions
of feedback introduced by Granger (1963) and Caines and
Chan (1975). They are non-negative; the measure of linear
dependence is zero if and only if the two series are sec-
ond-order independent, and the measure of directional
feedback is zero if and only if “causality is unidirec-
tional” in the sense of Granger (1969) and Sims (1972).
The earlier article (Geweke 1982) introduced measures
of directional and instantaneous linear feedback between
two vector time series, and the measures of directional
* John F. Geweke is Professor, Department of Economics, Duke Uni-
versity, Durham, NC 27706. Most of the work reported was undertaken
while the author was Professor of Economics at the University of Wis-
consin. Financial support from National Science Foundation Grant
SES-8207638, the Graduate School of Research Committee of the Uni-
versity of Wisconsin, and the Sloan Foundation is gratefully acknowl-
edged.
90 7
feedback were decomposed by frequency. For a vector
X (consisting of the money stock and an interest rate) and
real output Y , for example, the measures would indicate
the extent to which observed linear dependence between
X and Y is feedback to or from real output and the im-
portance of this feedback frequency by frequency. Other
aspects of this relationship, however, will be of interest
to the macroeconomist as well (e.g., Sims 1980). In par-
ticular, does money (or the interest rate) affect output
conditional on the interest rate (or money)? If so, is this
effect primarily short run, or is it associated with the busi-
ness cycle, or does it persist over the longer run? This
article provides one approach to such questions, intro-
ducing measures of linear dependence and feedback be-
tween two vector time series conditional on a third, and
thus takes up a suggestion of Pierce (1982). The article
further provides a decomposition of directional condi-
tional linear feedback by frequency, which facilitates one
characterization of conditional relationships among time
series.
A second contribution of the present article is to draw
together existing techniques for point estimation and in-
ference to attack a problem in statistical inference left
unresolved in Geweke (1982) and even more acute here.
The problem stems from the fact that our estimators are
highly nonlinear functions of parameter estimates for
which the only distribution theory is asymptotic. Con-
ventional expansions produce computationally unwieldy
expressions, and as a consequence, only tests of some
convenient null hypotheses (rather than confidence in-
tervals) could be reported in the preceding article. For
typical samples of macroeconomic time series, the ap-
propriateness of asymptotic theory is circumspect in any
event. The essence of the procedure implemented here
is to combine the computationally efficient canonical fac-
torization alogrithm of Whittle (1963a) with a parametric
bootstrap (Efron 1982, chap. 5 ) to produce point esti-
mates with a first-order correction for small sample bias
and approximate confidence intervals for these estimates.
The plan of the article is as follows: In the next section,
the statistical model is set forth and the construction of
unconditional measures of linear dependence and feed-
back are reviewed. The extension to conditional meas-
ures is undertaken in Section 3, which constitutes the
main theoretical contribution of the article. Computa-
0 Journal of the American Statlsticai Association
December 1984, Volume 79, Number 388
Theory and Methods Section
 908 Journal of the American Statistical Association, December 1984

z1
tional methods are described in Section 4, as is the ap- In(/ I// 2, I). Attractions of these and some related
proach to inference. An empirical example involving measures are enumerated in the earlier paper (Geweke
money, interest rates, and output concludes the article. 1982).
The measures of directional linear feedback Fy+x and
2. ASSUMPTIONS AND BACKGROUND FXhy may be decomposed by frequency. We shall review
this process in some detail for Fy+x. Let the auto-
Consider a wide-sense stationary, purely nondetermin- regressive representation for X and Y be
istic, multiple time series of dimension n, W = {wr, t
integer}. The series has the moving average representa-
tion
m
Bllt(L) BIZt(L)
BZ1t(L) BU'(L)] =[ (2.5)
[;:] [:I
and the corresponding moving average representation be
WI = ASLr-S = A(L)EI,E(rr)= 0,
s=o

var(cr) = P, (2.1)
where the As are square summable and A. = I,, . Let S,(A) with Bllt(0) = Allt(0) = I k , B2zt(0) = Azz+(O) = 11,
denote the spectral density of W at frequency A, and as- var(Eltt) = 2 2 , Var(Ezrt) = Tz. (Observe that the lag op-
sume that there exists c > 0 such that for almost all A E erators here are not partitions of those in (2.1) or (2.3)
[-T,TI,
and the variances involved are not related in any simple
way to var(eI).) Let C = cov(eltt, ~221,
c - 'Z,,@S ,(A) @I,, ,
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This assumption guarantees (Rozanov 1967, pp. 77-78)

the existence of the autoregressive representation
m
A*(L) = A t ( L ) D - ' , and E? = DE:, and renormalize (2.6)
to
B(L)w, = Bswl-, = €1, (2.3)
s=o

where the B, are square summable, Bo = I,,, and the

vector is identical to the one in (2.1).
Suppose now that wr has been decomposed into k x
1, 1 x 1, and rn x 1 vectors xI, yr, and z l : Wr' = (xI', ytl,
2,'). Let Wr- 1 = {Wt-,, s = 1,2, . . .}, and adopt a similar
notation for the subvectors. From (2.2) any subvector of
itr has autoregressive and moving average representa-
tions. The work preceding this article (Geweke 1982) fo-
cused on the nt x 1 subvector W: = (Xt', yr')' and used
the existence of autoregressive representations for sub-
vectors to define 21= var(xr / Xr - I ) , 2 2 = var(xt / Xt- I ,
Yt-11, TI = var(yr I Y r - i ) , TZ = var(y, I Yt-11, and Y =
var(w2 I WI- I t ) . (Here and elsewhere, conditional vari-
ance is taken to be the variance about the linear projec-
tion.) The measures of linear feedback from Y to X,linear
feedback from X to Y,and instantaneous linear feedback
were defined to be, respectively,
FY-x = 141 811/1 XZ I), Fx-Y = MI TI 111 TZ I),
The measure of linear dependence was defined as
FX+y = ln(l 811.1 TI 111 y 1)
= Fy-x + Fx,y + Fx.y.
These measures were motivated by forming the popula-
tion analog of likelihood ratio statistics (under the as-
sumption that is Gaussian) for tests of the hypothesis
that feedback of the stated type does not exist. For
example, if conditional on X I - 1 , xI is uncorrelated
with Yr-1, then I X I I = I X2 I, and the likelihood ratio
test statistic in a sample of size T would be T
In (2.6) and €2: are uncorrelated by construction, and
Alzt(0) = 0 but Azl*(0) # 0 (in general). Letting "-"
denote the Fourier transform of a matrix polynomial lag
operator and S,(A) the spectral density of X,(2.7) implies
&(A) = A11*(A)8zAlIS(h)'
+ AIZ~(A)(TZ
- C'XZ-~C)AIZ"(A)'.
(2.8)
This provides the classical spectral decomposition of var-
iance in X,together with a further decomposition of var-
iance into that attributed to €12and €2;. The vector €1:
has a concise interpretation, most readily seen in (2.5):
It is that part of that first entered the system only
through its effect on X. (There is no such interpretation
of eZrSexcept when C = 0: an alternative but obvious
renormalization of (2.6) is required to produce Az2*(L).)
Proceeding as in the construction of FY-X, the measure
of linear feedback
fY--.X(A) = In([ SAX) I/(A11*(h)CzA11*(U'1) (2.9)
is suggested. It turns out to be the case (Geweke 1982,
theorem 2) that
(2.4)
but FY+X = (1/2a) JYT fY4X(A) dA if and only ifAIlS(L)
is invertible-that is, I A I 1 * ( LI) # 0 for all I L I 5 1. The
latter condition is not implied by our assumptions but is
nearly always satisfied by point estimates of A I I * ( L ) .
 Geweke: Condltional Dependence and Feedback 909

3. MEASURES OF CONDITIONAL LINEAR Symmetrically Fx,vz- = FXZ-Y- Fz-Y. To pro-

DEPENDENCE AND FEEDBACK vide a similar intuitive interpretation of Fx.vZ- , we
introduce the measure of instantaneous linear feedback
At afairly abstract level, the approach taken in Geweke
between x,y,and z:
(1982) leads immediatelv to measures of conditional linear
-
dependence and feedback. Let Qr denote a set of infor- Fx.y.z = ln{l var(x, I Wr-1) I I var(yr I Wr-1) 1
mation dated t , and suppose that
- 1 var(zr 1 Wr-1) 11) W W r 1 Wr-1) 1). (3.6)
var(xr 1 xt-1, @r-'l)r vm0.r I Yt-1, @ r - l ) , A little manipulation of (3.3) and (3.6) shows that Fx.vz-
and var(w2 1 W t - l t , @r-l) = Fx.y.z - Fz.xy; and of course, Fx,vz- = Fyjxjz-
are all well defined and time invariant. Constructing the
+ By
Fx+vz- + Fx.yz-.
these are all nonnegative,
population analog of Gaussian likelihood ratio statistics,
and they are in limiting that may be described
we have
in terms of the parameters of (3.5). The case Fy,qz- =

the conditions F x . ~ z -= 0 and cov(e1,, €2,) = 0 are

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equivalent. If X is forecast one step ahead by using the

population linear projection of xt on Xr - and Z , - 1 , then
when Yr-1 is added to the projection set, the reduction
in the generalized variance of the mean squared forecast
(3.3) error is 1 - exp(-FY,xlz-). These measures of con-
and ditional linear dependence and feedback defined here
share with measures of unconditional linear dependence
Fx.yp-
and feedback the property of invariance with respect to
scaling of a general kind: If the series XI, yr, and are
respectively filtered by invertible linear filters, then the
measures are unchanged.
Notice that the identity (2.4) extends to these measures: Measures of conditional and unconditional linear de-
Fx. yo - = Fy-xlm- + Fx-+vm- + Fx.va- pendence and feedback can be related in an alternative
way that is useful in establishing a decomposition of con-
We shall consider the case Q r - = Zr- 1. The case in ditional directional feedback by frequency consistent
which is the history of a vector sharing an auto- with (2.9). Write the joint autoregressive representation
regressive representation with X and Y is analytically of (X, Z )
tractable, and in prospective economic applications,
Zr- rather than Z seems to be the natural conditioning
set. (What follows in this section may obviously be ap- [ Dzz ( L )
D Z l m DlZW)
Dll(L) ]= I;:[ I:;[ (3.7)
plied to Z, - for any finite s simply by redating.) Partition with the normalization D11(0) = Zk, Dzz(O) = I,,,, DIZ(O)
9

the autoregressive representation (2.3) in the form = 0, and COV(Xr*, Zt*) = 0 imposed; in general Dzl(0) #
Bll(L) BlZ(L) B13(L) 0. Since
BZl(L) Bzz(L) Bz3(L) var(xr I Xr- 1 , Zr- 1) = var(xr*)
B31(L) B3Z(L) B33(L) and
Replacing Q r - 1 with Zr- 1 in (3.1)-(3.4) provides the var(xt I X r - 1 , Yr - 1 , Zr- 1 ) = var(xr I Xr - i * , Yr- 1, Zr - i * )
measures of linear dependence and feedback between X = var(xr* I Xr- I*, Yr- 1 , Zt- I * ) ,
and Y conditional on Z - .
These measures may be expressed in terms of measures
of unconditional linear dependence and feedback. In the
case of (3.1),
FYjqz- = In
-
= P'YZL+X'.
I v d x r* 1 Xr-i*) I
I
var(xt I Xr-1) I}
Fy+qz- = In
{
vx(xr I Wr - 1 ) I The decomposition of Fy+qz- by frequency may there-
fore by derived from the appropriately normalized mov-
var(xt 1 Xt--lrzr-dI ing average representation for X* and YZ*. Let
+
In{'
1 var(xr I X I - 1 ) 1 c 11( L ) ClZ(L)

= Fyzhx - Fzhx.
 910 Journal of the American Statistical Association, December 1984

be the moving average representation for (X,Z) corre-
sponding to (3.7): Cl1(0) = Zk, Czz(0) = Zm, and Clz(0)
= 0. Let (3.5) be the autoregressive representation for
W normalized so that Bll(0) = I k , Bzz(0) = ZI,B 3 3 ( 0 ) =
Zm, B12(O) = 0,B 1 3 ( 0 ) = 0,Bz~(O)= 0,COV(€it, € j r ) = O
for i # j ; denote var(Eit) = Pi.
Let the corresponding moving average representation
for W be
= A(Lkr, (3.9)
in which A(0) is lower block triangular. The moving av-
erage representation appropriate for the formation of
~ Y Z * + X * ( A ) is then
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4. COMPUTATION AND INFERENCE
The computation of point estimates of the measures
introduced here and the formation of confidence intervals
for these estimates is a nontrivial task. Three factors com-
plicate matters. First, the parameterization of the vector
time series model-either (2.1) or (2.3)-is inherently in-
finite dimensional. Second, the asymptotic distribution
theory for the measures seems to be intractable even in
the hypothetical case in which the parameterization is in
a known space of finite dimension. Given the nonlinearity
of expressions like (3.11) and (3.12) in the parameters of
(2.1) or (2.3) and the length of economic time series rec-
ords typically available, one suspects that this asymptotic
theory would not be reliable in any event. Reintroduce
the problem of approximating the infinite-dimensional
parameterization, and a formal but practical approach to
inference seems precluded. The final factor is that there
is no obvious single best way to derive numerical values
for expressions like (3.7) and (3.8) from numerical values
for (2.1) or (2.3).

The parameterization chosen for the illustration re-

ported in the next section is an autoregression of order
with p. This choice can be justified on the grounds that if the
coefficients of (3.1) are square summable, then zr may be
approximated arbitrarily well in mean square by an au-
toregression of suitably large but finite order; but its main
attraction is the computational efficiency of some cor-
responding estimation algorithms. Although various cri-
since F(0) is lower block triangular. This leads to the teria for the choice of p have been proposed (reviewed
variance decomposition in Geweke and Meese 1981), none of these are designed
SX*(A) = Fii(N’iFii(A)’ + fi12(A)P2fiiz(A)~ for subsequent inference in the case in which the order
of the autoregression is not really finite. A more cogent
+ p13P3fi13(A)’, procedure is to report key findings for several values of
p representative of a set that includes all lag lengths
analogous to (2.8), and the definition
thought to be an adequate a priori. For example, let
~ Y - X I Z - (A) f~.z*+x*(A)
= In{/ SAX) 1 1 1 ~ ’1f i ~
( ~ ) ~ (A)
In {I var(xI*) 111 Fl~(AIP~F~~(A)’
= 11, (3.11) where 11.11 denotes the largest eigenvalue norm. If the prior
with distribution of p is .25 cx2(4), then results for five lag
lengths ranging from .5c to 5c might be reported. We shall
kll(A) = L%i(A)All(A) + i)12(A)A31(A). (3.12) return to this point in the empirical example.
In the estimation of the vector autoregression of order
Clearly f Y , ~ Z - ( A ) 2 0, but it need not be finite for all p , presumed deterministic components (e.g., nonzero
A. Since FI1(0)= Ik,however, theorem 4.2 of Rozanov
means or deterministic trends) are removed by ordinary
(1967) applies: least squares (OLS) regression. Given a sample of size
T, the estimate
T
rj = T - ’ 2 x ~ x ~ - ~ ~
with equality if and only i f F ( L )is invertible. Hence 0 5 t=j+l

fy-,xlz- (A) < m a.e. in [ - a , a], and

of rj = Extxt-j’ is computed, for j = 0, . . . , p. The
algorithm of Whittle (1963a) is then used to solve the
Yule-Walker equations, providing estimates &L) of
B ( L ) and f‘ of P. This computational procedure has four
with equality if and only if I F ( L ) I # 0 for all L such that attractions: First, the estimator is asymptotically equiv-
IL151. alent to the OLS estimator, in the sense that the limit of
 Geweke: Conditional Dependence and Feedback
the difference of the estimators scaled by Ti" is zero.
Second, B ( L )is an invertible lag operator (Whittle 1963a),
whereas the OLS estimate of B ( L ) can easily be nonin-
vertible even whenB(L) is invertible. This is an attractive
property, since all of the measures introduced in this ar-
ticle presume the existence of stable autoregressive rep-
resentations. Third, computation time is proportional to
pZn3(compared with p3n3 for OLS) and storage is pro-
portional to pn2 (compared with p2n2). Finally, Whittle's
algorithm provides recursive estimates of vector auto-
regressions of order 1, 2, . . . , p and the corresponding
variance matrices of the residuals (more on this later).
The single disadvantage of the algorithm is that it provides available to approximate the variances or distributions of
no analog of the moment matrix from which the variance
of OLS estimates is approximated, but that is not a factor
in the approach to inference taken here.
Point estimates are formed by replacing B ( L )with &L)
and P with f' in the derivations in Section 3. Estimates
of expression (3.3) and of the denominators of (3.1) and
(3.2) are formed directly from f'. The numerator of (3.1)
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is I var(x,*) 1, where xr* is defined by (3.7) or (3.8); es- lows: Suppose that cr in (2.1) is normally distributed and
timation of this quantity requires inference of the rep-
resentation of the (X,Z) process from B(L) and f'. Since
B(L)wr = 6 ,
I B ( L ) I wr = B*(L)EY,
where B*(L) = Adj[B(L)] is of order p(n - 1). Hence
I B ( L ) I w, is MA(p(n - I)), as are all subvectors of sures
1 B ( L ) I wr, including the one corresponding to the (X,2) F x - ~ of
process. The spectral density of (X,2)is readily inferred
from (2.3), and the spectral density 1 B(A) 12S,,(A) can
then be computed. The latter is the spectral density of an
MA(p(n - 1)) process whose innovations are x,* and zr*,
which can be represented as
where B ( L ) is of order pn and C'(L) is of order p(n -
1). The matrix polynomial C"(L)may be computed, using
the canonical factorization algorithm outlined by Whittle
(1963b, pp. 102-103). This essentially involves inversion
of S,,(A), an inverse Fourier transform, followed by an
application of the Whittle (1963a) AR(p(n - 1)) algo-
rithm. This provides var(x,*). In these computations the
fast Fourier transform (Cooley and Tukey 1965)withpn(n
- 1) ordinates was exploited to preserve both speed and
computational accuracy. The computations are not exact,
however: more ordinates increase accuracy, and the
choice of pn(n - 1) was made after experimentation with
a variety of vector moving average processes of known
order.
Consider next the computation of fy-x,z- (A), which
requires estimates of (3.8) and of (2.3) normalized so that
B(0) is lower block triangular. Since the Whittle (1963a,b)
algorithms adopt the normalization that the zero-order
term of the matrix lag polynomial is the identity matrix,
this may be accomplished by using the Choleski decom-
position of the estimated variance matrix. This leads to
9ll
&), f', and @ ( L ) appropriately normalized. Fourier
transforms b(A) of b ( L )and @(A) of @ ( L ) are computed
at the desired frequency, and these are inverted to pro-
duce estimates A(A) of A ( A ) and b ( A ) of / B(A) I-'b(A).
This leads at once to
Eii"(A) = bii"(A)Aii(A) + Biz0(A)A3i(A)
and
~Y-XIZ- (A)
= ln{l v$r(x,*) 1-1 B(A) flo(A)f'l~ll~(A)' I}.
There is no tractable asymptotic distribution theory
estimators like Fxjqz- of F x - . ~ z - and fx-qz-(A) of
fx4ylz- (A). In addition, there is some systematic finite
sample bias, since these estimators are non-negative by
construction: it is natural to suspect that such upward
biases become substantial as (in this example) kp be-
comes a non-negligible fraction of sample size. One might
try to adduce experimental evidence on this point as fol-
the autoregression is in fact of order p. Generate R rep-
lications of sample size T directly from the synthetic pop-
ulation &L)w, = cr, - , t = p + 1, . . . ,
N ( o , ~ )for
T ; for t 5 p, the shorter autoregressions provided by
Whittle's algorithm are used.
Obtain the R-fold replication of estimates of the mea-
interest from the synthetic sample, for example,
z - ' , i = 1, . . . , R. Let
R
FX-WZ-
*(R) R-1
i= 1
x
Fx-qz- ,
i
and define b(R)= xjqz-/Fx-,~z-*(R). If the percentage
bias in Fx+qz- is the same for all B(i)and P,then
Fx-qz- - = b(R)kx4 qz- = (b"R')2Fx qz - * ( R ) j
converges to an unbiased estimator of Fx+qz- almost
surely in R. Let 1 = [aR/2], u = R - [&/2], and
$'x4yz-('1 denote a typical order statistic. Maintaining
the assumption of constant percentage bias, a lOO(1 -
a)% confidence interval is
(b2Fx qz-( I ) , b'Fx+
j qz- (U').
Confidence intervals for all measures reported in the sub-
sequent illustration were formed in this way.
The bias correction and confidence interval are much
like those made in the bootstrap as discussed by Efron
(1982). There are three differences. First, we assumed a
distributional form for er, and in this respect the proce-
dure is like the parametric bootstrap (Efron 1982, sec.
5.2). This was done only for computational convenience.
The empirical distribution function of &L)w, or other
parametric forms could have been used. Second, the pro-
cedure applied here implicitly takes the bias function to
be linearly homogeneous in the parameter of interest,
whereas the bootstrap usually takes it to be constant.
Neither assumption is likely to be true globally, and both
 912 Journal of the American Statistical Association, December 1984

will be true locally if the true bias function is smooth.
Both procedures are asymptotically defensible in the lat-
ter case. The present procedure is relatively attractive
because fix-, qz- is arithmetically non-negative. Finally,
in lieu of the random sampling assumption that is fun-
damental to the bootstrap procedure, we have assumed
that the et are iid. The procedure used here is thus best
motivated if w tis known to be an autoregressive, linear
process of order p; robustness with respect to these rather
stringent assumptions remains an outstanding problem.
5. AN EMPIRICAL EXAMPLE
The following example is chosen to illustrate the pro-
posed methodology. The time series involved are the total
monthly rate of return for U.S. Treasury Bills, referred
to as i (and denoted “Treasury Bill Returns” in Tables
2-6); the monthly growth rate of industrial production, y
(and “D log IndProd”); and the monthly growth rate of
the money supply MlB, m (and “D log MlB”). The
first series is taken from Ibbotson and Sinquefield (1978).
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equations incorporated an intercept and 11 seasonal dum-
mies; in view of the shortness of the sample, the possi-
bility of slowly evolving seasonality was not investigated.
In estimation only the list of variables and the length
of the lag in the truncated vector autoregression are spec-
ified a priori. Some evidence on the plausibility and im-
plications of some alternative lag specifications is set
forth in Table 1, pertaining to measures of feedback from
i to y in the two-variable system and to measures of feed-
back from i to y conditional on m in the three-variable
system. The likelihood statistics reported are the values
of - T In 1 f‘ I for the various specifications, which form
the basis of conventional portmanteau tests of lag length
specification. (Since the estimator is not the exact max-
imum likelihood, these statistics are only convenient ap-
proximations of the evaluated likelihood function.) In
both systems conventional tests would reject a lag length
specification of one month as a restriction on three
months, but all other specifications would fail to be re-
jected as restrictions on more generous parameteriza-

The other two series are prepared monthly by the Federal
Reserve Board (Federal Reserve Bulletin 1981). These
series were chosen because of considerable recent inter-
est in the relative contributions of money and interest
rates to fluctuations in output (Sims 1980 and Litterman
and Weiss 1981). The period chosen for the illustration
is January 1966 through December 1979 for reasons dis-
cussed in Geweke (1983).The interest rate series is avail-
able only in seasonally unadjusted form, so to avoid
asymmetric seasonal adjustment bias (Wallis 1974), only
unadjusted data were used in estimation. All estimated
tions.
The remaining lines of Table 1 report point estimates
of measures of linear feedback and conditional linear
feedback and their decomposition by frequency. Not sur-
prisingly, estimates of overall feedback, p, increase with
lag length; but these increases are most likely insignificant
beyond 24 months. More strikingly the character of the
decomposition of feedback by frequency changes system-
atically with increased lag length. When lag lengths are
short, point estimates at frequencies corresponding to the
business cycle (period of 36 to 60 months) are similar to

Table 1. Alternative Lag Length Specifications

~ ~~~~

F(i to y) F(i to y I m - )

Lag Length 1 3 12 24 30 36 1 3 12 24 30 36
Likelihood 4,034 4,055 4,086 4,128 4,239 4,153 5,096 5,169 5,350 5,433 5,477 5,527
f ,017 ,050 .081 .125 ,122 .145 .017 ,048 ,108 .125 ,132 ,157
Point Estimates
Period 6b
Infinite .263 ,943 .615 .164 ,049 .075 .225 .928 .815 .418 ,188 .214
240 ,253 .815 ,611 .218 .112 ,106 .216 ,805 .a09 .483 ,246 .227
96 .211 ,486 .575 .601 ,393 .304 .181 ,484 .765 .799 .560 .358
72 .183 ,359 .530 A16 ,578 .410 ,157 ,359 ,715 .957 ,843 .560
60 ,162 .287 ,483 ,717 .666 .441 .139 .287 ,663 .945 1.067 .791
48 .133 .212 ,407 .449 .600 ,447 ,115 ,212 ,573 .734 1.067 1.042
36 .097 ,141 .296 ,210 ,279 .376 .084 ,140 .429 .374 ,467 .542
30 .076 ,109 .233 .119 ,114 .209 .066 ,107 .340 .197 .174 .217
24 ,054 .080 ,173 ,029 ,011 ,031 .048 ,079 .248 ,049 .025 .035
18 .034 ,057 .122 .048 .091 ,115 ,031 .055 ,166 ,093 .095 ,164
12 .016 ,040 .072 .299 .187 ,185 ,017 .038 .094 .259 .237 .182
.9 .010 .034 .021 ,169 ,166 .134 .011 .032 .032 .134 ,119 .144
6 .005 ,032 ,041 .140 .180 ,206 ,007 .029 ,021 ,113 .214 .298
5 .003 ,032 .058 .015 .005 .097 ,006 .029 ,039 .071 .039 .044
4 ,002 .031 ,006 ,023 ,018 .050 .005 ,028 .014 .033 ,086 ,109
3.5 .002 ,027 .025 ,014 ,033 ,171 .004 .025 .014 .055 ,145 .090
3 ,002 .018 ,111 ,161 .083 ,057 .003 ,018 .082 ,069 ,024 .012
2.75 .001 .013 .217 ,118 ,060 .lo9 .003 ,013 .lo6 .028 ,036 .213
2.5 ,001 .007 ,015 ,019 .036 .016 .002 .oo9 .031 .029 .072 .253
2.25 ,001 .003 ,020 ,138 .176 ,108 ,000 .005 ,188 .021 ,015 ,011
2 .001 .002 ,010 .031 .014 .005 ,000 .004 ,070 .197 ,173 .312
a Likelihood = - T l n 1 PI.
The estimates in each row correspond to a specific frequency a. Period is 2nlA
 Geweke: Condltional Dependence and Feedback 9l3

those at lower frequencies (period of 72 months and Table 3. Estimated Measures of Linear Feedback,
greater) because this constraint is implicitly imposed by Monthly Data From January 1966 to December 1979
the parsimonious parameterization. Longer lag lengths
indicate a concentration of feedback at cyclical rather lnferquartile
Original Range
than longer periodicities. To avoid blurring the distinction Point Adjusted
between cyclical and lower frequencies, which is impor- Estimate Estima fe 25.0% 75.0%
tant in the economic interpretation of the results, it was
F ( X t 0 v) .178 ,108 .092 .122
decided to retain a lag length of 30 in the example. 4%.v) ,004 ,001 ,000 ,002
Before discussing further the estimated measures of f ( X t 0 Y)
conditional feedback, estimated measures of uncondi- Period
tional feedback, which help to place the conditional mea- Infinite ,006 ,000 ,000 ,000
240.000 ,014 ,002 ,000 ,002
sures in context and illustrate a reporting style suited to 96.000 .055 ,020 ,006 ,032
the bootstrap estimator, are presented in Tables 2-4. Es- 72.000 .090 .047 ,015 .064
timated measures of feedback from i to y are shown in 60.000 .119 ,073 ,022 ,097
48.000 ,154 ,105 ,028 ,141
Table 2, from m to y in Table 3, and from i and m jointly 36.000 ,161 ,115 ,023 ,153
to y in Table 4. 30.000 ,134 ,091 ,022 ,131
Consider the estimates presented in Table 2. The sec- 24.000 ,096 .046 ,011 ,068
18.000 ,177 ,091 ,027 ,127
ond column provides the original point estimates. The 12.000 ,163 ,130 ,045 ,185
implied reduction in the mean squared error of prediction 9.000 .133 ,066 .018 .096
of y from the introduction of past i (in the first two rows) 6.000 ,538 ,698 ,362 ,894
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5.000 ,039 ,007 ,002 ,010

and the fraction of the spectral density in y accounted for 4.000 .010 ,001 .ooo ,001
by innovations to i in the bivariate autoregression (in the 3.500 .lo5 ,042 .012 .063
rest of the rows) is indicated within parentheses. For ex- 3.000 ,201 ,144 ,059 ,198
2.750 ,322 ,248 ,069 ,324
ample, the adjusted estimate implies that incorporation 2.500 .059 ,014 ,005 ,019
of past i would reduce the one-step-ahead mean squared 2.250 ,367 ,270 ,085 ,342
error of prediction of y by 5.6% from what it would be if 2.000 ,031 ,005 ,001 ,007
only past y were used in prediction; at the frequency, NOTE: Based on 30 lags. 168 ObSeNatiOnS, and 100 replications. Dummy variables are
.06671~,corresponding to a periodicity of 60 months, constant seasonals. X vector = D log M1B. and Y vector = first difference of log of
industrial production.

Table 2. Estimated Measures of Linear Feedback, Table 4. Estimated Measures of Linear Feedback,
Monthly Data From January 1966 to December 1979 Monthly Data From January 1966 to December 1979
In terquartile lnterquartile
Original Range Original Range
Point Adjusted Point Adjusted
Estimate Estimate 25.0% 75.0% Estimate Estimate 25.0% 75.0%

F ( X t o v) .122 .057 .046 ,064 F ( X t 0 v) ,320 ,167 ,146 ,187

w.v) .ooo .ooo .ooo .ooo 4%.v) ,007 ,002 ,000 ,002
fWto v) f ( X t 0 v)
Period Period
Infinite .049 .006 .ooo .009 Infinite ,224 ,052 ,009 ,052
240.000 .112 .028 .006 .047 240.000 ,269 ,091 ,033 .130
96.000 .393 .248 .082 .352 96.000 ,562 ,333 ,186 ,410
72.000 578 .438 .182 ,626 72.000 ,912 ,795 .468 1.003
60.000 .666 532 .196 .735 60.000 1.230 1.386 ,779 1.913
48.000 .600 .545 .187 .728 48.000 1.235 1.371 ,683 1.768
36.000 .279 .218 .077 .284 36.000 ,513 ,379 ,177 ,491
30.000 .114 ,062 ,019 .069 30.000 ,237 ,116 ,051 .140
24.000 .011 .001 .ooo .001 24.000 ,114 ,029 ,012 ,036
18.000 ,091 ,034 ,010 .046 18.000 ,154 ,041 ,024 .051
12.000 .187 .120 .036 .169 12.000 .400 ,283 ,136 ,318
9.000 .166 .099 .038 ,118 9.000 .237 ,097 .050 ,139
6.000 .180 .098 .027 .127 6.000 ,663 .473 ,234 ,637
5.000 .005 ,000 .ooo .ooo 5.000 ,079 ,013 ,005 ,018
4.000 .018 .001 .ooo .002 4.000 .119 ,034 .013 ,044
3.500 .033 ,006 .002 .008 3.500 ,290 ,152 ,068 ,208
3.000 .083 .032 .007 .042 3.000 ,191 ,082 ,039 ,111
2.750 .060 ,019 .006 .027 2.750 ,313 ,151 ,066 ,195
2.500 .036 .008 .002 .011 2.500 ,200 ,055 ,026 .067
2.250 .176 .115 .038 .149 2.250 .199 ,060 ,026 ,073
2.000 .014 .001 ,000 ,001 2.000 ,213 .055 ,017 ,066
~~

NOTE: Based on 30 lags, 168 observations, and 100 replications. Dummy verlables are NOTE: Based on 30 lags, 168 ObSONatiOnS. and 100 replications. Dummy variables are
constant and seasonale. Xvector = Treasury Bill returns, and Yvector = first dltference constant seasonals. Xvector is Treasury Bill returns ( i ) and first difference of log of M1B
of log Of Industrial production. ( m ) ,and Yvector is first difference of log of industrial production ( y ) ,
 914 Journal of the American Statistical Association, December 1984

41.2% of the spectral density in y is attributed to inno- Table 6. Estimated Measures of Conditional Linear
vations in i. The third column provides estimates with Feedback, Monthly Data From January 1966 to
first-order correction for bias based on 100 replications. December 1979
Not surprisingly this adjustment is usually (always, in the
case of Table 2) downward. The last two columns provide lnterquartile
Original Range
the interquartile range for the adjusted estimates, formed Point Adjusted
as described in Section 4. For individual frequencies in- Estimate Estimate 25.0% 75.0%
terquartile ranges are large: except for very small point
~~~ ~~

F ( X t 0 YI Z-) ,181 .lo4 .085 .122

estimates, the lower quartile ranges from one-quarter to F(X.Y( 2-) ,007 .003 .ooo .004
one-half of the adjusted point estimate, and the upper f ( X t 0 Y I 2-)
quartile often exceeds the adjusted point estimate by Period
about 50%. Ranges for overall measures of feedback are Infinite ,244 .197 .027 ,255
240.000 ,243 ,198 ,038 ,245
smaller: this is to be expected, since they are the sum- 96.000 ,257 .231 ,072 .303
mation of the estimated measures of feedback by fre- 72.000 ,273 .257 .090 ,333
quency, which are in turn quasi-independent for sum- 60.000 ,326 .358 .132 .444
48.000 .366 ,433 ,159 ,527
ciently large separations (Geweke 1982). 36.000 ,310 ,307 ,095 ,401
The estimates in Tables 2-4 document the strong re- 30.000 ,236 ,193 ,058 ,277
lation of these series at business-cycle and some shorter 24.000 .117 ,049 .013 .070
18.000 ,165 .081 .020 ,107
frequencies. Overall feedback from m to y exceeds that 12.000 .226 ,194 ,066 ,295
from i to y, but this occurs mainly because of strong feed- 9.000 .067 ,015 ,005 .022
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back from m to y at the half-year periodicity and modest 6.000 ,502 ,462 .267 ,596
5.000 ,040 .007 .002 ,009
feedback at some other, higher frequencies. At business- 4.000 ,092 .051 .021 .076
cycle frequencies, however, innovations in i (Table 2) 3.500 ,094 .027 .010 ,038
account for a substantially larger fraction of the variation 3.000 ,137 .076 .024 .lo4
2.750 .190 ,094 ,036 ,141
in y than do those in m (Table 3) in bivariate autoregres- 2.500 ,140 .062 .015 .081
sions. The fraction of the cyclical variation in y accounted 2.250 .118 ,043 ,011 ,058
for by i and m together (Table 4) exceeds their individual 2.000 ,199 ,096 ,016 ,110
NOTE: Based on 30 lags. 168 ObSeNatIOnS. and 100 replications. Dummy variables are
constant seasonals. Xvector is first difference of log M l B , Yvector is first difference of
Table 5. Estimated Measures of Conditional Linear log of indusfrial production, and Zvector Is Treasury Bill returns.
Feedback, Monthly Data From January 1966 to
December 1979
contributions. At very low frequencies i and m account
In terquartile for almost none of the variation in y. Instantaneous feed-
Original Range back is always negligible.
Point Adjusted Estimated measures of conditional linear feedback and
Estimate Estimate 25.0% 75.0%
their decomposition are provided in Tables 5 and 6. To
F ( X t 0 Y I Z-) ,132 ,060 ,047 ,072 relate the overall estimated measures of directional con-
F(X.Y I Z-) ,000 ,000 .ooo ,000 ditional linear feedback to Tables 2-4, recall that in the
f ( X t 0 Y ( z-) population, Fxjvz- = F x z j y - Fz+y. That relation-
Period
Infinite ,188 ,049 ,006 ,071 ship will not hold exactly for either the point or adjusted
240.000 ,246 ,092 ,020 ,138 point estimates because the parameterization of the bi-
96.000 560 ,390 ,141 ,493 variate process in either Table 2 or Table 3 is more re-
72.000 ,843 ,884 .375 1.200
60.000 1.067 1.404 ,556 2.023 strictive than that of the corresponding marginal bivariate
48.000 1.067 1.566 ,584 2.169 process in the trivariate vector autoregressions for Tables
36.000 ,467 ,458 ,164 ,564 4-6. Nevertheless the agreement between the overall
30.000 .174 ,102 ,038 ,132
24.000 ,025 ,003 .001 ,003 conditional measures implied by Tables 2-4 and those
18.000 ,095 .030 .009 ,040 presented in Tables 5 and 6 is good. There was found to
12.000 ,237 ,144 ,053 ,176 be no such corresponding population relationship for the
9.000 ,119 ,043 .013 .056
6.000 .214 ,128 ,042 ,175 decomposition of conditional linear feedback by fre-
5.000 ,039 .007 .002 .010 quency, and this is best illustrated in this example by
4.000 ,086 ,027 ,010 ,035 comparing the point estimates or adjusted point estimates
3.500 ,145 ,079 ,030 ,100
3.000 ,024 ,002 ,001 ,003 for low frequencies in Tables 2 and 4 with those in Table
2.750 ,038 ,006 ,002 ,010 6.
2.500 ,072 ,026 ,010 ,031 Overall this example indicates that linear feedback
2.250 ,015 .001 .ooo ,001
from m to y conditional on i exceeds that from i to y
2.000 .173 ,083 ,012 .088
conditional on m. At those frequencies corresponding to
NOTE: Based on 30 lags. 168 observations, and 1W replications. Dummy variables are
constent seasonals. Xvector is Treasury Bill returns, Yvector is first difference of log of
the business cycle, conditional and unconditional linear
industrial production ( y ) , and Zvector is first difference of log of M1B ( m ) . feedback from i is more important than that from m:for
 Geweke: Condltlonal Dependence and Feedback 915

periodicities ranging from three to five years, i condi- GEWEKE, J., and MEESE, R. (1981), “Estimating Regression Models
tionally accounts for more than half of the variance in y, of Finite but Unknown Order,” International Economic Review, 21,
55-70.
whereas m so accounts for about 30%. Both i and m ,thus, GRANGER, C.W.J. (1963), “Economic Processes Involving Feed-
contribute to y , but i seems to have the dominant role in back,” Information and Control, 6,28-48 (see also Granger, C.W.J.,
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