Advertising and Aggregate Consumption: An Analysis of Causality

This paper is concerned with testing for causation, using the Granger definition, in a bivariate time-series context. It is argued that a sound and natural approach to such tests must rely primarily on the out-of-sample forecasting performance of models relating the original (non-prewhitened) series of interest. A specific technique of this sort is presented and employed to investigate the relation between aggregate advertising and aggregate consumption spending. The null hypothesis that advertising does not cause consumption cannot be rejected, but some evidence suggesting that consumption may cause advertising is presented.