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May/June 2007, 
Vol. 89, No. 3
Posted 2007-05-01

Granger Causality and Equilibrium Business Cycle Theory

by Yi Wen

Postwar U.S. data show that consumption growth “Granger-causes” output and investment growth, which is puzzling if technology is the driving force of the business cycle. The author asks whether general equilibrium models with information frictions and non-technology shocks can rationalize the observed causal relationships. His conclusion is they cannot.