The misuse of the Granger Causality Theorem

The Granger Causality theory has been abused by economists for quite a long time. The Granger Causality theory when posisitive implies that one times series changes step just before anpther one does so. It does not imply that one time series causes another one to change step, something the word causality might mean but like I said above, the only relationship is that one time series changes step before another one. They will also share a similar trend.

Although economists when using the Granger Causality theory do attest to its proper context, the conclusions they infer as a result go against the essential context the granger causality must be used in.

Take for an example a common granger tested scenario of whether money supply granger causes inflation. Usually economists have a positive result to that test. In this case the granger causality of money supply to inflation only means that money supply changes step before inflation and that we can use the behaviour of money supply to estimate the bahaviour of inflation. It doesn't mean that an increase in money supply imreases the inflation rate but the economists will infer so. Maybe increases in money supply causes the increase in the inflation rate if you reason it with other frameworks but if you are sorely basing your conclusions on the Granger Causality theory, that will be a misleading conclusion.