Efficient tests of long‐run causation in trivariate VAR processes with a rolling window study of the money–income relationship

This paper develops a simple sequential multiple‐horizon non‐causation test strategy for trivariate VAR models (with one auxiliary variable). We apply the test strategy to a rolling window study of money supply and real income, with the price of oil, the unemployment rate and the spread between the Treasury bill and commercial paper rates as auxiliary processes. Ours is the first study to control simultaneously for common stochastic trends, sensitivity of test statistics to the chosen sample period, null hypothesis over‐rejection, sequential test size bounds, and the possibility of causal delays. Evidence suggests highly significant direct or indirect causality from M1 to real income, in particular through the unemployment rate and M2 once we control for cointegration. Copyright © 2007 John Wiley & Sons, Ltd.