Introducing Granger Causality

1. Granger Causality Guy Lion December 2005

4. The Basic Picture Independent Variable being tested

5. The Whole Picture

6. Does Loan  Granger cause Deposit  Data source: quarterly basis since 2 nd quarter of 1987. Total loans and total deposits aggregated from Fed Data Flow of Funds Accounts (L109, L215, L216, L217, L222). Let’s test if Loan  Granger causes Deposit  . We will use Loan  with a 4 quarter lag since it has the highest correlation with Deposit  .

7. t Test (unpaired) (Loans cause Deposits) The Test model achieved a higher adjusted R Square of 0.41 vs the Base case model’s 0.28.

8. t Test (unpaired) (Deposits cause Loans) The Test model achieved a lower adjusted R Square of 0.45 vs the Base case model’s 0.46.

9. Loans  Granger causes Deposits  more than the reverse