Kevin D. Hoover

Post hoc ergo propter once more An evaluation of 'Does monetary policy matter?' in the spirit of James Tobin

Christina and David Romer’s paper ‘Does Monetary Policy Matter?’ advocates the so-called ‘narrative’ approach to causal inference. We demonstrate that this method will not sustain causal inference. First, it is impossible to distinguish monetary shocks from oil shocks as causes of recessions. Second, a world in which the Fed only announces intentions to act cannot be distinguished from one in which it in fact acts. Third, the techniques of dynamic simulation used in the Romers’ study are inappropriate and quantitatively misleading. And, finally, their approach provides no basis for establishing causal asymmetry.

The new classical macroeconomics

Over the past two decades the new classical macroeconomics has become the single most coherent school of macroeconomic thought. Always controversial, it has nonetheless captured centre-stage, and has become the standard by which competing schools of thought are judged. These volumes contain the most important and influential articles of the new classical school, as well as some important articles critical of new classical thinking. The volumes are arranged thematically, beginning with the rational expectations hypothesis and the application of general equilibrium to labour markets, and continuing with various new classical arguments for the ineffectiveness of government policy. The core of the volumes is Lucas’s famous critique of econometric policy

The new classical macroeconomics : a sceptical inquiry

Part 1 Introduction: the varieties of maroeconomics. Part 2 The labour market and business cycles: clearing labour markets market-clearing models of the business cycle. Part 3 Monetary theory and policy: the limits of monetary policy - macroeconomic models the new monetary economics formal models of monetary economies the limits of policy - micromodels. Part 4 Econometric issues: econometrics and the analysis of policy. Part 5 The new classical methodology: two types of monetarism? an Austrian revival.

Automatic Inference of the Contemporaneous Causal Order of a System of Equations

David Hendry and Hans-Martin Krolzig have demonstrated that PCGets, an automatic model selection algorithm that implements general-to-specific search procedures, can be successfully applied to the individual equations of vector autoregressions (VARs), provided that the contemporaneous causal order is known so that the covariance matrix of the VAR is diagonal. Graph-theoretic causal-search algorithms provide a means of determining the contemporaneous causal order of a VAR needed before general-to-specific search procedures can be applied. This paper explains the basis for those algorithms with special reference to VARs.

Sound and fury: McCloskey and significance testing in economics

For about twenty years, Deidre McCloskey has campaigned to convince the economics profession that it is hopelessly confused about statistical significance. She argues that many practices associated with significance testing are bad science and that most economists routinely employ these bad practices: “Though to a child they look like science, with all that really hard math, no science is being done in these and 96 percent of the best empirical economics. . .” (McCloskey 1999). McCloskey’s charges are analyzed and rejected. That statistical significance is not economic significance is a jejune and uncontroversial claim, and there is no convincing evidence that economists systematically mistake the two. Other elements of McCloskey’s analysis of statistical significance are shown to be ill-founded, and her criticisms of practices of economists are found to be based in inaccurate readings and tendentious interpretations of their work. Properly used, significance tests are a valuable tool for assessing signal strength, for assisting in model specification, and for determining causal structure.

The Logic of Causal Inference: Econometrics and the Conditional Analysis of Causation

Discontented people might talk of corruption in the Commons, closeness in the Commons and the necessity of reforming the Commons, said Mr. Spenlow solemnly, in conclusion; but when the price of wheat per bushel had been the highest, the Commons had been the busiest; and a man might lay his hand upon his heart, and say this to the whole world, – ‘Touch the Commons, and down comes the country!’

Nonstationary Time Series, Cointegration, and the Principle of the Common Cause

Elliot Sober ([2001]) forcefully restates his well-known counterexample to Reichenbachs principle of the common cause: bread prices in Britain and sea levels in Venice both rise over time and are, therefore, correlated; yet they are ex hypothesi not causally connected, which violates the principle of the common cause. The counterexample employs nonstationary data—i.e., data with time-dependent population moments. Common measures of statistical association do not generally reflect probabilistic dependence among nonstationary data. I demonstrate the inadequacy of the counterexample and of some previous responses to it, as well as illustrating more appropriate measures of probabilistic dependence in the nonstationary case. 1. A challenge to the principle of the common cause2. Sobers argument and the attempts to rescue the principle3. Probabilistic dependence4. Nonstationary time series5. Probabilistic dependence in nonstationary time series6. Do Venetian sea levels and British bread prices violate the principle of the common cause? A challenge to the principle of the common cause Sobers argument and the attempts to rescue the principle Probabilistic dependence Nonstationary time series Probabilistic dependence in nonstationary time series Do Venetian sea levels and British bread prices violate the principle of the common cause?

Measuring Systematic Monetary Policy

The 1970s and early 1980s witnessed two main approaches to the analysis of monetary policy. The first is the early new classical approach of Lucas, based on the assumptions of rational expectations and market clearing. The second is the a theoretical econometrics of Simsâ??s VAR program. Both have developed: the new classical approach has been enriched through various accounts of price stickiness, cost of adjustment or alternative expectational schemes; the original VAR program has developed into the structural VAR program. This paper clarifies the relationship between these two programs. Based on work of Cochrane (1998), it shows that the typical method of evaluating unanticipated, unsystematic monetary policy is correct only if the conditions necessary for Lucasâ??s policy-ineffectiveness proposition hold, while recent methods for evaluating systematic monetary policy violate Lucasâ??s policy-noninvariance proposition (â??the Lucas critiqueâ??). The paper shows how to construct and estimate (using regime changes) a model in which some agents form rational-expectations and others follow rules of thumb. In such a model, monetary policy actions can be validly decomposed into systematic and unsystematic components and valid counterfactual experiments on alternative systematic monetary-policy rules can be evaluated.

The causal direction between money and prices. An alternative approach

Abstract Causality is viewed as a matter of control. Controllability is captured in Simons analysis of causality as an asymmetrical relation of recursion between variables in the unobservable data-generating process. Tests of the stability of marginal and conditional distributions for these variables can provide evidence of causal ordering. The causal direction between prices and money in the United States 1950–1985 is assessed. The balance of evidence supports the view that money does not cause prices, and that prices do cause money.

Causality in Economics and Econometrics

An entry for the New Palgrave Dictionary of Economics. Traces the history of causality in economics and econometrics since David Hume. Examines the main modern approaches to causal inference.