Non-causality due to omitted variables

Abstract

Generally the causal structure of a subprocess of a multivariate stochastic process does not allow conclusions concerning the causal structure of the higher dimensional process. It is well- known that Granger-causality in a bivariate system may be due to an omitted variable. It is also known that non-causality in a bivariate system may theoretically result from neglected variables. Using Canadian income, money and interest rate it is demonstrated that this actually occurs in practice.