PRESENT VALUE RELATIONS, GRANGER NONCAUSALITY, AND VAR STABILITY

When in the class of “exact” present value ~PV! relations the decision variables do not Granger cause the explanatory variables, and a vector autoregressive ~VAR! process is used to derive the cross-equation restrictions, the system embodies explosive roots, which hardly can be reconciled with the typical features observed in most macroeconomic time series+ This paper investigates the issue+