Causal Inference for Structural Equations: With an Application to Wage-Price Spiral

Authors:
Pu Chen;Chih-Ying Hsiao
Affiliations:
University of Melbourne, Melbourne, Australia;University of Technology, Sydney, Broadway, Australia
Venue:
Computational Economics
Year:
2010

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Abstract

Economic theories are often formulated as a system of structural equations. These structural equations imply genuinely causal relations, i.e., we regard the right-hand side variables as the causes and the left-hand side variables as the effects. In this paper we show that regression is not the proper way to infer causal relations. Based on the theory of inferred causation we propose a method to derive structural equations from multivariate time series. We apply this method to study the wage-price spiral for the Australia economy.