Estimating the long memory Granger causality effect with a spectrum estimator

This paper discusses the Granger causality test by a Spectrum estimator which allows the transfer function to have long memory properties. In traditional methodology the relationship among variables is usually assumed to he short memory or contemporaneous. Hence, we have to make sure they are of the same integrated order, else there might be a spurious regression problem. In practice, not all the variables arc fractionally co-integrated in the economic model. They may have the same random resources, but under a different integrated order. This paper focuses on how to capture the long memory Granger causality effect in the transfer function. This does not necessarily assume the variables are of the same fractional integrated order. Moreover, by the transfer function we construct an estimator to test the long memory effect with the Granger causality sense. Copyright (c) 2006 John Wiley & Sons, Ltd.