On the Temporal Causal Relationship Between Macroeconomic Variables

The present study examines the dynamic interactions amongmacroeconomic variables such as real output, prices, money supply, interest rate (IR),and exchange rate (EXR) in India during the pre-economic crisis and economic crisisperiods, using the autoregressive distributed lag (ARDL) bounds test for cointegration,Johansen and Juselius multivariate cointegration test, Granger causality/Blockexogeneity Wald test based on Vector Error Correction Model, variance decompositionanalysis and impulse response functions. The empirical results reveal a strongerlong-run bilateral relationship between real output, price level, IR, and EXR during thepre-crisis sample period. Moreover, the empirical results confirm a unidirectionalshort-run causality running from price level to EXR, IR to price level, and real outputto money supply during the pre-crisis period. Also, it is evident from the test resultsthat there exist short-run bidirectional relationships running between real output andEXR, price level and IR, and IR and EXR in the pre-crisis era, respectively. Mostimportantly, long-run bidirectional causality is found between real output, EXR, and IRduring the economic crisis period. And the study results indicate short-runbidirectional causality between money supply and EXR, IR and price level, and IR andoutput in India during the crisis era. Also, a short-run unidirectional causality runsfrom prices to real output in the crisis period