In the philosophy of science, a causal model (or structural causal model) is a conceptual model that describes the causal mechanisms of a system. Mailing address: Faculty of Economics, University of Cambridge, Austin Robinson Building, Sidgwick Avenue, Cambridge CB3 9DD, UK.Comparison of two competing causal models (DCM, GCM) used for interpretation of fMRI images This work was supported by the William Dow Chair in Political Economy (McGill University), the Bank of Canada (Research Fellowship), the Toulouse School of Economics (Pierre-de-Fermat Chair of excellence), the Universitad Carlos III de Madrid (Banco Santander de Madrid Chair of excellence), a Guggenheim Fellowship, a Konrad-Adenauer Fellowship (Alexander-von-Humboldt Foundation, Germany), the Canadian Network of Centres of Excellence, the Natural Sciences and Engineering Research Council of Canada ( 8581-2011), the Social Sciences and Humanities Research Council of Canada ( 435-2013-1835 435-2015-1886 430-2015-01206), and the Fonds de recherche sur la société et la culture (Québec) ( 2015-SE-179521). Earlier versions of this paper were presented at 4th CSDA International Conference on Computational and Financial Econometrics (University of London), and the BMRC-DEMS Conference on Macro and Financial Economics/Econometrics (Brunel University). The authors thank Lutz Kilian, Markus Poschke, Barbara Rossi, Abderrahim Taamouti, Jean-Michel Zakoïan, Victoria Zinde-Walsh, two anonymous referees and the Editor, Richard Baillie, for several valuable comments. In contrast with earlier results on the non-predictability of exchange rates, we find that the macroeconomic/trade-based mechanism plays a central role in exchange-rate dynamics, despite the financial feature of these markets. We identify clear causal patterns: (1) there is evidence of Granger-causality between commodity prices and exchange rates in both directions across multiple horizons, but the statistical evidence and measured intensity of the effects are much stronger in the direction of commodity prices to exchange rates, especially at horizon one: the ratios of causality measures in two different directions can be quite high (2) causality is stronger at short horizons, and becomes weaker as the horizon increases (3) conditioning on equity prices (the S&P500) does not change the patterns of causality measures found in the unconditional cases (4) the main results are robust to eliminating U.S.-dollar denomination effects and including a short-term interest rate as the conditioning variable. Both unconditional and conditional (given general stock market conditions and short-term interest rates) causality measures are considered, and allowance for “dollar effects” is made by considering non-U.S. Since low-frequency data may easily fail to capture important features of the relevant causal links, daily and some 5-minute data are exploited. To go beyond pure significance tests of Granger non-causality and provide a relatively complete picture of the links, measures of the strength of causality for different horizons and directions are estimated and compared. We examine these causal relationships empirically, using data on three commodities (crude oil, gold, copper) and four countries (Canada, Australia, Norway, Chile), over the period 1986–2015.
Different causal mechanisms have been proposed to link commodity prices and exchange rates, with opposing implications.
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