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Figure 1 is a causal graph that represents this model specification. Each variable in the model has a corresponding node or vertex in the graph. Additionally, for each equation, arrows are drawn from the independent variables to the dependent variables. These arrows reflect the direction of causation.
Establishing causal relationships is the aim of many scientific studies across fields ranging from biology [1] and physics [2] to social sciences and economics. [3] It is also a subject of accident analysis, [ 4 ] and can be considered a prerequisite for effective policy making.
In the LM model of interest rate determination, [1]: pp. 261–7 the supply of and demand for money determine the interest rate contingent on the level of the money supply, so the money supply is an exogenous variable and the interest rate is an endogenous variable.
Judea Pearl defines a causal model as an ordered triple ,, , where U is a set of exogenous variables whose values are determined by factors outside the model; V is a set of endogenous variables whose values are determined by factors within the model; and E is a set of structural equations that express the value of each endogenous variable as a function of the values of the other variables in U ...
Causal analysis is the field of experimental design and statistics pertaining to establishing cause and effect. [1] Typically it involves establishing four elements: correlation, sequence in time (that is, causes must occur before their proposed effect), a plausible physical or information-theoretical mechanism for an observed effect to follow from a possible cause, and eliminating the ...
Causal inference is the process of determining the independent, actual effect of a particular phenomenon that is a component of a larger system. The main difference between causal inference and inference of association is that causal inference analyzes the response of an effect variable when a cause of the effect variable is changed.
Directed acyclic graph – Directed graph with no directed cycles; Negative feedback – Reuse of output to stabilize a system; Path analysis (statistics) – Statistical term; Positive feedback – Feedback loop that increases an initial small effect; Strange loop – Cyclic structure that goes through several levels in a hierarchical system
Causation in economics has a long history with Adam Smith explicitly acknowledging its importance via his (1776) An Inquiry into the Nature and Causes of the Wealth of Nations and David Hume (1739, 1742, 1777) and John Stuart Mill (1848) both offering important contributions with more philosophical discussions.