Economic Modelling 35 (2013) 153–158

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Economic Modelling
journal homepage: www.elsevier.com/locate/ecmod

Government expenditures and trade deficits in Turkey: Time domain

and frequency domain analyses
Selim Kayhan a,⁎, Tayfur Bayat b,1, Bahadir Yüzbaşı c,1
a
Department of Economics, Bozok University Faculty of Economics and Administrative Sciences, 66200 Yozgat, Turkey
b
Department of Economics, Inonu University Faculty of Economics and Administrative Sciences, 44280 Malatya, Turkey
c
Department of Econometrics, Inonu University Faculty of Economics and Administrative Sciences, 44280 Malatya, Turkey

a r t i c l e i n f o a b s t r a c t

Article history: The purpose of this study is to determine the causality between trade deficit and government expenditures in
Accepted 18 June 2013 the Turkish economy. We employ bootstrap process-based Toda-Yamamoto causality and frequency domain
Available online xxxx analysis methods. Results obtained from both methods imply that there is a bi-directional causality between
trade deficits and government expenditures. Different from Toda-Yamamoto causality analysis, frequency
Keywords:
domain causality analysis indicates that the causality running from government expenditures to trade defi-
Trade deficit
Government expenditure
cits exists in the short and medium terms while causality runs from trade deficits to government expendi-
Frequency domain analysis tures in the short and long runs.
Turkish economy © 2013 Elsevier B.V. All rights reserved.

1. Introduction study concludes that a temporary increase in government expenditures

As in other developing countries, trade deficit is one of the major
problems for the Turkish economy since the ruling government put
into effect stabilization program, the so called “24 January Decisions”
in 1980. The program's main purposes were to integrate the economy
into the global economy and to reduce the role of government in the
whole economy (Karabulut, 2010). In the context of the program, the
government has started to implement the export-led industrializa-
tion strategy instead of import-substitution industrialization strategy.
The total amount of export and import increased remarkably in
the initial years of the program. While the international trade volume
was just over 10 billion U.S. Dollar in 1980, it increased to more than
25 billion U.S. Dollar just in ten years. By taking the process in liberal-
ization, the volume of international trade has gained momentum and
the amount of international trade reached to 375 billion U.S. Dollar at
the end of 2011. For all that increasing trade volume, however, the
gap between import and export which has revived trade deficit by
the beginning of export led the growth period. The trade deficit has
decreased only in the periods of economic crisis.
There are a wide range of hypotheses explaining the sources of trade
deficits in the literature. One of them suggests that an increase/or a
decrease in government expenditures induces trade balance. In an
early study, Ahmed (1986, 1987) examines the relationship between
government expenditure and trade deficit in the British history. The
⁎ Corresponding author. Tel.: +90 354 242 1042; fax: +90 3544 242 1044.
E-mail addresses: selim.kayhan@bozok.edu.tr (S. Kayhan), tayfur.bayat@inonu.edu.tr
(T. Bayat), bahadir.yuzbasi@inonu.edu.tr (B. Yüzbaşı).
1
Tel.: +90 422 377 4271; fax: +90 422 341 0438.
has larger effect than permanent increase in the one during 1732–1830
period. Roubini (1988) finds out that government budget deficits that
took place because of expanding government consumption, deteriorate
trade deficit. According to results, an increase in government expendi-
ture for a U.S. Dollar would cause an increase in trade deficit between
0.22 and 0.98 U.S. Dollar in the U.S. economy. Similarly, Frenkel and
Razin (1986), Yi (1993) and Baxter (1995) conclude the existence of
the causation linkage from government expenditures to trade deficits
in the U.S. economy. Lane and Perotti (1998) analyze the movements
in different components of fiscal policy on trade balance for 17 OECD
countries, indicating that shifts in wage government consumption sig-
nificantly deteriorate the external account. Cavallo (2005) analyzes
the effects of government expenditures on trade balance in the U.S.
economy by decomposing the expenditures into two groups: First one
is government consumption expenditures on final goods and second
is government expenditures on hours. Analysis results imply that gov-
ernment expenditures on hours do not affect trade deficits directly.
However, author notes that the second group of expenditures has
remarkable effect on trade deficits. On the other hand, Erceg et al.
(2005) find out that there is a relatively small relationship between
trade deficits and government expenditures in the U.S. economy.
Monacelli and Perotti (2007) analyze the causal relationship for OECD
countries, implying that a rise in government spendings induces trade
deficit strongly for all countries except the U.S. economy. Some studies,
on the other hand, report that a temporary increase in government ex-
penditures would improve trade balance. Analysis results of Koray and
McMillin (2006) and Müller (2004, 2008) declare that a positive gov-
ernment purchase shock increases budget deficit and improves trade
balance in the U.S. economy.

0264-9993/$ – see front matter © 2013 Elsevier B.V. All rights reserved.
http://dx.doi.org/10.1016/j.econmod.2013.06.022
154 S. Kayhan et al. / Economic Modelling 35 (2013) 153–158
The studies examining the Turkish economy in the context of source
of trade deficits focus mainly on the relationship between trade deficits
and budget deficits. A significant number of the studies support the con-
ventional twin deficit hypothesis implying a causal relationship from
budget deficits to trade deficits in the Turkish economy. Akbostanci
and Tunc (2002), and Acaravci and Ozturk (2008) support the hypoth-
esis in the long run while Gok and Altay (2007) and Yaprakli (2010)
imply that the hypothesis is valid in the short run. Also Gunaydın
(2004), Unsal (2006), Sever and Demir (2007), Celik et al. (2008) and
Erdinc (2008) find similar results for the Turkish economy. On the
other hand, Bilgili and Bilgili (1998), Kustepeli (2001) and Arıcan
(2005) support the Ricardian equivalence hypothesis for the Turkish
economy implying the neutrality between budget and trade deficits.
There are also a few studies indicating bi-directional causality
between budget deficits and trade deficits in the Turkish economy.
Ata and Yucel (2003), Ay et al. (2004), Utkulu (2001) and Barisik
and Kesikoğlu (2010) and Yay and Tastan (2007) conclude that the
feedback hypothesis implying bi-directional causality between trade
and budget deficits is valid in the economy.
The maintenance of fiscal discipline in the context of “Program for
Transition to a Strong Economy” has achieved to reduce budget deficits
in 2000s. Despite of the budget deficit, trade balance still has worsened
in this period as illustrated in Fig. 1. Furthermore, the amount of govern-
ment expenditures increases during the whole period. The ratio of gov-
ernment expenditures to GDP increases as indicated in Fig. 1. Different
from previous studies investigating the effect of government on the
trade deficits in the Turkish economy, the movements of economic vari-
ables in question require investigation of the possible relationship
between trade deficits and government expenditures.
In the light of the explanations, the purpose of this study is to
investigate whether there is a relationship between government expen-
ditures and trade deficit in Turkey. The contribution of this study into
the national and international literature is twofold. First, to our knowl-
edge, the literature investigating the determinants of trade deficit in the
Turkish economy is more focused on the relationship between budget
deficit and trade deficit in the context of twin deficit hypothesis and
there is no study particularly examining the trade deficits and govern-
ment expenditures in the Turkish economy. For this reason we try to
fill this gap in the literature. Therewithal, one of the main goals of the
medium term fiscal policy program which the Ministry of Finance has
started to implement in 2012 is to reduce the trade deficit in the econ-
omy. By investigating the relationship, we also aim to predict the
success of the program in reducing the trade deficit volume. In this
regard, the analysis results might be useful from the perspective of
policymakers to practice sound fiscal policies in reducing trade deficit.
Fig. 1. Trade deficit/GDP and government expenditures/GDP ratios.
Secondly, the study benefits from the recent developments in the
time series econometric analysis and carries out frequency domain
causality and bootstrap based Toda Yamamoto linear causality methods.
By doing so, we compare the results of time domain (Toda Yamamoto
linear causality method) and frequency domain methodologies. Com-
parison of analysis results might give insight about the robustness of
each methodology. On the other hand, the New Keynesian approach
accepts that size and direction of interaction between economic vari-
ables can change over time due to rigidities in an economy. In this
regard, the relation between two economic variables might disappear
in the long run, although it is strong in the short run. By employing
the frequency domain method which allows to analyze the causality
between economic variables in different time periods, we analyze the
causation linkage between deficits in the context of the new Keynesian
approach.
The rest of paper is organized as follows. In the next section, we try
to explain transmission mechanism between government expenditures
and trade deficits. In the third section, we introduce the data employed
in the empirical analysis. In the fourth section, we summarize the meth-
odology. The fifth section reveals the empirical findings. Finally, the
empirical findings are interpreted and policy implications are discussed
in the Conclusion section.
2. Theoretical background
Theoretically, the interaction between government expenditures
and trade deficits can be interpreted via different channels. First one
is savings channel. Elwell (2008) explains savings as a flip side of
spendings. But he emphasizes the advantage of focusing on savings
to understand aggregate trade imbalances. Because, with the fluid
world capital markets, domestic saving–investment imbalances will
tend to cause two equivalent transfers from the other economies:
First one is the transfer of loans and the latter one is the transfer of
real output. In this understanding, Mankiw (2006) interpreted U.S.
trade deficit as a result of saving imbalances in the country. According
to him, the U.S. trade deficit reflects a “global saving glut”. Because
there is so much savings in the rest of the world. As a result of saving
surplus, foreigners would invest savings in the U.S. markets. It is an
economic identity that the amount of investment undertaken by an
economy will be equal to the amount of saving that is available to
finance investments. But for a nation this identity can be satisfied
through the use of both domestic and foreign savings (Elwell, 2008).
So, if there is a gap between domestic savings and investments, foreign
investments or savings would reconcile imbalance in the economy.
 S. Kayhan et al. / Economic Modelling 35 (2013) 153–158
We can explain Elwell's interpretations by using well-known
saving-investment identity approach. According to the approach,
components of gross domestic product can be presented by using
expenditures approach as in the following Eq. (1),
Y ¼ C þ I þ G þ ðX−M Þ
where Y is the gross domestic product, it equals to the sum of private
consumption expenditures C, gross private domestic investment
expenditures I, government expenditures G and trade balance denoted
by (X − M). Gross domestic product can be expressed by using income
approach also,
Y ¼ C þ S þ T:
In Eq. (2), S and T denote savings and taxes collected by the gov-
ernment, respectively. We can equalize Eqs. (1) and (2) as follows,
C þ I þ G þ ðX−M Þ ¼ C þ S þ T:
When we re-arrange Eq. (3), we obtain Eq. (4) as follows,
ðX−M Þ ¼ ðS−IÞ þ ðT−GÞ:
Eq. (4) implies that savings of government and private agents would
determine the way of trade imbalance in the economy. An increase in
investment belonging to private agents or an increase in government
purchases would induce trade deficit in the economy.
The absorption approach identifies the trade balance as the difference
between the national income and domestic expenditures. So the trade
balance can be written as follows:
TB ¼ Y–E
where Y denotes national income and E denotes domestic expenditures.
According to absorption approach, trade balance would improve if
national income increases more than domestic expenditures. In that
respect, the government expenditure is a share of domestic expenditures
and thereby the trade balance deteriorates if government expenditures
increase. According to this approach, an expansionary fiscal policy can
improve trade balance, if it increases income more than government
expenditures made in the context of policy.
Lastly, we can explain the effect of an increase in government
expenditures on the trade deficit via IS-LM and Mundell–Fleming
model. In an open economy, an increase in government expenditures
would affect aggregate demand positively and induce a shift in IS-curve.
The shift triggers an increase in equilibrium interest rate level. High inter-
est rate would cause net capital inflow from abroad and result in appreci-
ation of the nominal exchange in the context of Mundell–Fleming model.
Appreciated nominal exchange rate would adversely affect net exports
due to overvalued domestic currency by cheapening import goods and
making expensive export goods. While volume of import increases,
export volume moves to opposite direction. So the trade deficit occurs.
3. Data
In this study, we employ gap between import and export data in
order to measure trade deficit and government's expenses in budget of
central government data in order to measure expenditures of govern-
ment. While trade deficit is a standard data, the definition of government
expenditures covers different expense items. That is why we employ the
largest definition covering government's all expenditures relating to
existing literature. The quarterly data belonging the Turkish economy
is collected for the period 1987Q1–2011Q3.2
2 3
We could not employ data covering 1980–1986 period because of absence of reli-
able data for this period.
155
Trade deficit of the economy is measured in U.S. Dollar. We convert
it into Turkish Lira by employing nominal U.S. Dollar exchange rate. We
employ expenditures of the Turkish government by means of Turkish
Lira. Both of them are collected from International Financial Statistics
Yearbook of International Monetary Fund.
ð1Þ
4. Econometric methodology
4.1. Hacker and Hatemi-J (2006) bootstrap process-based Toda-Tamamoto
(1995) linear granger causality test
In a standard Granger causality analysis, zero restrictions based on
the Wald principle are imposed on the lagged coefficients obtained
ð2Þ
from the estimation of Vector Autoregressive (VAR) model. However,
the Wald statistic may lead to nonstandard limiting distributions
depending upon the co-integration properties of the VAR system that
these nonstandard asymptotic properties stem from the singularity of
the asymptotic distributions of the estimators (Lütkepohl, 2004). The
ð3Þ
Toda and Yamamoto (1995) (TY, hereafter) procedure overcomes this
singularity problem by augmenting VAR model with the maximum
integration degree of the variables. In addition to this advantage, the
ð4Þ TY approach does not require testing for co-integration relationships
and estimating the vector error correction model and is robust to the
unit root and co-integration properties of the series.
The standard Granger (1969) causality analysis requires estimating
a VAR (p) model in which p is the optimal lag length(s). In the TY pro-
cedure, the following VAR (p + d) model estimated that d is the maxi-
mum integration degree of the variables.
yt ¼ v þ A1 yt−1 þ ⋯ þ Ap yt−p þ ⋯ þ Apþd yt−ðpþdÞ þ μ t : ð6Þ
ð5Þ
where yt is the vector of k variables, v is a vector of intercepts, μt is a vector
of error terms and A is the matrix of parameters. The null hypothesis of
no-Granger causality against the alternative hypothesis of Granger causal-
ity is tested by imposing zero restriction on the first p parameters. The
so-called modified Wald (MWALD) statistic has asymptotic chi-square
distribution with p degrees of freedom irrespective of the number of
unit roots and of the co-integration relations.
Hacker and Hatemi-J (2006) investigate the size properties of the
MWALD test and find that the test statistic with asymptotic distribu-
tion poorly performs in small samples. ⊗ the Kronecker product, C =
p × n(1 + n(p + d)) a selector

 matrix, SU variance–covariance ma-
^ ¼ vec D ^ and vec is the column-stacking operator
trix of residuals, β
as the MWALD test statistics;

′  
−1  −1

^ C Z′Z
MWALD ¼ C β ⊗SU C
′ ^ ∼χ 2 :
Cβ p
Monte Carlo simulation of Hacker and Hatemi-J (2006) shows that
the MWALD test based on the bootstrap distribution has much smaller
size distortions than those of the asymptotic distribution. Hacker and
Hatemi-J (2006) extend the TY approach based on the bootstrapping
method developed by Efron (1979).3 In this new approach that is
so-called the leveraged bootstrap Granger causality test, the MWALD
statistic is compared with the bootstrap critical value instead of the
asymptotic critical value.
4.2. Frequency domain causality test
Frequency domain causality was developed by Granger (1969),
Geweke (1982), Hosoya (1991), and Breitung and Candelon (2006).
See Hacker and Hatemi-J (2006:1492–1493) for the details of the bootstrap
method.
156 S. Kayhan et al. / Economic Modelling 35 (2013) 153–158

In his work, Geweke (1982) defined two-dimensional vector of time The results represented in Table 2 for the bootstrap process based
series zt = [xt, yt]′ and zt has a finite-order VAR; linear TY Granger type causality method show that there is a strong
bi-directional causality between government expenditures and trade
ΘðLÞzt ¼ εt ð7Þ deficits in the Turkish economy.
We demonstrate the results of frequency domain causality analysis
where Θ(L) = I − Θ1L−... − ΘpLp and lag polynomial with Lkzt = in Table 3. The results imply bi-directional causality between variables
zt − 1. Breitung and Candelon (2006) assume that εt is white noise as found in linear causality analysis. Different from linear causality anal-

 ysis, this method permits to investigate causation linkage in different
with E(εt) = 0 and E ε t ; ε′ t ¼ Σ, where Σ is positive definite. Let G
time periods. By using this opportunity, we find out that causality
be the lower triangular matrix of the Cholesky decomposition G′ G = from government expenditures to trade deficits exists in medium


′
Σ−1 such that E ηt η t ¼ I and ηt = G εt. If the system is stationary, term and short term. Causality disappears in the long run. On the
let ϕ(L) = Θ(L)−1 and ψ(L) = ϕ(L)G −1
the MA representation; other hand, the causality from trade deficit to government expenditures
exists over the short and long periods.
      Both of the analysis methods imply that there is a bi-directional cau-
ϕ11 ðLÞ ϕ12 ðLÞ ε1t ψ11 ðLÞ ψ12 ðLÞ η1t
zt ¼ ϕðLÞεt ¼ ¼ : sality between variables. More importantly, frequency domain results
ϕ21 ðLÞ ϕ22 ðLÞ ε2t ψ21 ðLÞ ψ22 ðLÞ η2t
indicate that the causation linkage from trade deficits to government
ð8Þ
expenditures exists even in the long run. On the other hand causal rela-
tionship from government expenditures to trade deficit disappears in
Let that we can use this representation for the spectral density of xt; the long run. This result brings to mind a question that whether the
effects of government expenditures perishes in the context of objec-
1 n
 
−iω 2 

 o
−iω 2 tions of Barro (1989) about Ricardian equivalence hypothesis. In this
f x ðωÞ ¼ ψ11 e  þψ12 e  : ð9Þ
2π instance, there would be no chance to reduce trade deficit by decreasing
government expenditures.
Details of frequency domain causality method are given in the
Appendix A.
6. Conclusion
5. Empirical findings
The Turkish economy experiences the high trade deficits since 1980s
where the economy integrated to global economy by the program
Before proceeding to the identification of causality between the gov-
named “24 January Decisions”. In addition to high trade deficits, high
ernment expenditures and trade deficits, it is necessary to determine in-
budget deficit problem brings to mind the validity of “twin deficit
tegration degree of variables. In that respect, we employ a battery of the
hypothesis” in the Turkish economy until the last years. The mainte-
unit root tests developed by Dickey and Fuller (1979, 1981) (henceforth
nance of fiscal discipline in the economy in the context of program
ADF), Phillips and Perron (1988) (henceforth PP), Elliot et al. (1996)
“Program for Transition to a Strong Economy” has achieved to reduce
(henceforth DF-GLS) and Kwiatkowski et al. (1992) (henceforth KPSS).
budget deficits in 2000s. Despite of the budget deficit, trade balance
The results from the unit root tests in Table 1 show that ADF and PP
has worsened in this period. The government announced a new medium
tests do not reject the null of a unit root for the levels of the government
term fiscal program in 2012. In the context of this program, policy
expenditures and the trade deficit in Turkey. When the ADF and PP tests
makers also aim to decrease the trade deficit.
are applied to the first differences of the variables, the results indicate
In this study, we aim to predict success of the fiscal program in
that both variables are stationary. Consistent with these results, the
reducing trade deficits. In order to do that, we analyze the relationship
KPSS test for the null hypothesis of stationary shows that the variables
between trade deficits and government expenditures by employing two
are stationary in the first difference form. The unit root analysis thereby
different causality analysis methods, bootstrap process based Toda
implies that the variables are integrated of order one. Accordingly, the
Yamamoto Granger causality test and frequency domain causality test.
maximum integration order (d) of the variables is equal to the one in
Employment of these causality analyses gives opportunity to compare
the Toda Yamamoto linear Granger causality analysis.
time domain and frequency domain causality analyses also.
To determine lag length of VAR (k), we've employed Akaike infor-
According to the results obtained from linear causality analysis,
mation criterion and we have found lag length as three. According to
there is a bi-directional causality between the variables. Similarly, fre-
lag length of VAR process, we employ modified Wald test for VAR (4)
quency domain analysis results also implies bi-directional causality.
to get results of Toda-Yamamoto causality test in both methodologies.
This provides strong evidence about the robustness of each method.
But the superiority of the frequency domain causality approach is
Table 1
Unit root test results.
that it decomposes time periods and finds causality in different time
frequencies. In this angle, while the causality running from govern-
ADF DF-GLS PP KPSS ment expenditures to trade deficit disappears in the long run, reverse
Levels causality holds in the both short and long runs. This could mean that
Intercept GE −1.324 (1) −0.388 (1) −1.101 (4) 1.183
TD −2.245 (4) −0.737 (2) −1.261 (1) 1.161
Intercept and GE −2.94 (1) −2.881 (1) −2.778 (4) 0.175⁎⁎⁎
trend TD −1.905 (4) −2.396 (4) −2.129 (3) 0.271⁎⁎⁎ Table 2
Linear TY granger causality test results.
First-differences
Intercept GE −7.939 (0)⁎⁎⁎ −4.086 (1)⁎⁎⁎ −7.988 (2)⁎⁎⁎ 0.04⁎⁎⁎ Bootstrap critical values
TD −5.974 (3)⁎⁎⁎ −1.122 (2) −8.425 (5)⁎⁎⁎ 0.091⁎⁎⁎
Statistic 1% 5% 10%
Intercept and GE −7.905 (0)⁎⁎⁎ −7.164 (0)⁎⁎⁎ −7.954 (2)⁎⁎⁎ 0.042⁎⁎⁎
trend TD −6.181 (3)⁎⁎⁎ −2.087 (2)⁎⁎ −8.582 (7)⁎⁎⁎ 0.062⁎⁎⁎ GE to TD 34.542 (0.00)⁎⁎⁎ 12.92 8.619 6.72
TD to GE 18.122 (0.00)⁎⁎⁎ 12.986 8.33 6.573
Notes: The figures in the parentheses indicate that the number of lags selected is based
on the SBC for the ADF test; the bandwidth selected is based on Newey–West using Notes: The SBC was used to determine the optimal lag lengths for VAR (p + d) models.
Bartlett kernel for the PP test. Bootstrap critical values are obtained from 10,000 replications. GE denotes government
⁎⁎⁎ Denotes statistical significance at 1% level. expenditures and TD denotes trade deficits.
⁎⁎ Denotes statistical significance at 5% level. ⁎⁎⁎ Denotes statistical significance at 1% level.
 S. Kayhan et al. / Economic Modelling 35 (2013) 153–158
Table 3
Results of frequency domain causality test.
GE to TD
Long term Medium term Short term
ωi 0.01 0.05 1.00 1.50 2.0
5.078 5.066 10.607⁎ 19.357⁎ 0.163
Notes: The lag lengths for the VAR models are determined by SIC. F-distribution with (2, T-2p) degrees of freedom equals 5.99.
GE denotes government expenditures and TD denotes trade deficits.
⁎ Denotes the existence of causality between variables.
government expenditures affect trade deficit in the shorter periods,
while trade deficit affects government expenditures even in the
long run.
In the light of theoretical and empirical interpretations, we imply
that the reduce in the government expenditures will be successful
in reducing trade deficits. But the permanent decrease in trade deficit
needs additional policy applications. In this regard, the success of
medium term fiscal program in reducing the trade deficit depends
on not only reduce in government expenditures but also structural
change in fiscal policies supporting the exporting sectors in the coun-
try. Because the causality from government expenditures to trade
deficit exists only in the shorter time periods and there are some
additional factors those affect trade balance in the long run. The gov-
ernment expenditures focused on infrastructure and new investment
incentive system announced in 2012 might be helpful to solve chron-
ic trade deficit problem in Turkey by guiding the direct investments
to more value added sectors in order to increase export volume.
The existence of causality from trade deficit to government expen-
ditures shows that a decrease in trade deficit induces reduction in
government expenditures even in the long run. So, a successful fiscal
policy application in reducing trade deficit also achieves to decrease
the share of government in the whole economy by reducing govern-
ment expenditures in the long run. Finally, disappearance of causality
running from government expenditure to trade deficit in the long run
brings the question into mind that “Is Ricardian equivalence holds in
the long run in the context of Barro's objections even government
expenditures are used?”. This finding might an important start point
for further studies.
Acknowledgement
We thank the referees for their guiding critics.
Appendix A
To test for causality based on frequency domain, Geweke (1982)
and Hosoya (1991) defined causality;

 3
" # 2 −iω 2
2πf x ðωÞ jψ12 e j
¼ log41 þ 5 Efron, B., 1979. Bootstrap methods: another look at the jackknife. The Annals of Statistics
My→x ðωÞ ¼ log
jψ11 e−iω j2 jψ11 e−iω j2
if |ψ12(e− iω)|2 = 0 that y does not cause x at frequency ω. If compo-
nents of zt are I(1)and cointegrated, Θ(L) has a unit root. Breitung and
Candelon (2006) investigate the causal effect of My → x(ω) = 0 if
|ψ12(e− iω)|2 = 0. The null hypothesis is equivalent to a linear restric-
tion on the VAR coefficients. Then the VAR equation for xt can be
implied as
xt ¼ α 1 xt−1 þ ::: þ α p xt−p þ β1 yt−1 þ ::: þ βp yt−p þ ε 1t
and the null hypothesis My → x(ω) = 0 is equivalent to the linear
restriction with β = [β1,..., βp]′
H0 : RðωÞβ ¼ 0
157
TD to GE
Long term Medium term Short term
2.50 0.01 0.05 1.00 1.50 2.00 2.50
6.708⁎ 9.566⁎ 9.532⁎ 3.835 4.088 7.691⁎ 3.435
and
 
cosðωÞ cosð2ωÞ ::: cosðpωÞ
RðωÞ ¼ ða4Þ
sinðωÞ sinð2ωÞ ::: sinðpωÞ
The causality measure for ω ∈ (0,π) can be tested a Standard F-test
for the linear restrictions. The test procedure follows an F-distribution
with (2, T-2p) degrees of freedom.
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