In 2001, Heo and Tan published an article in which they used the Granger causality model to test the relationship between economic growth and democracy. For years, political scientists have noted a strong positive relationship between economic growth and democracy, but the authors of previous studies (which included Granger causality studies) disagreed about the causality involved. Heo and Tan studied 32 developing countries and found that economic growth “Granger-caused” democracy in 11 countries, while democracy “Granger-caused” economic growth in 10 others.
a. How is it possible to get significant Granger causality results in two different directions in the same study? Is this evidence that the study was done incorrectly? Is this evidence that Granger causality tests cannot be applied to this topic?
b. Based on the evidence presented, what’s your conclusion about the relationship between economic growth and democracy? Explain.
c. If this were your research project, what would your next step be?
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