Power-Boosted Granger-Causal Discovery for Large Heterogeneous Panel Data

Abstract

This paper proposes a power-enhanced panel Granger causality test (PE-PGCT) for assessing the Granger non-causality in heterogeneous and potentially high-dimensional panel data. Building on any existing panel Granger non-causality test, we show, both theoretically and empirically, that the proposed PE-PGCT boosts its power substantially. The power gains are particularly significant in situations of high-dimensional panels when the cross-sectional dimension exceeds the time dimension, as well as under sparse alternatives when the signals are sparsely distributed across panel units. We establish rigorous theoretical guarantees on the asymptotic behavior of the proposed power enhancement component, demonstrating attractive power enhancement properties that it induces negligible size distortion under the null hypothesis while delivering significant power gain under the alternatives. The empirical performances are illustrated via extensive simulation studies, as well as a real-world application.