This is typical of these tests and researchers often use the criterion most convenient for their needs. The readout should be: The correct lag length will depend on the criteria or measure we use. For our example, we use a general-to-specific specification although some authors might specify a specific-to-general instead. The idea is that for each lag length, if there is no improvement in the fit from the inclusion of this last lag then the difference in errors should not be significantly different from white noise. Alimentazione premiati i vincitori del contest pubblicitario per An alternative to minimising a weighted measure of the lag length and best fit, as above, is to systematically test for the significance of each lag using a likelihood ratio test discussed in Lutkepohl,section 4. These two statistics are measures of the trade-off fit against loss of degrees of freedom so that the best lag length should minimise 2 both of them. We've selected a lag length of 5 for this estimate but is that appropriate? Answer: Adding more lags always improves the fit but it reduces the degrees of freedom and increases the danger of overfitting.Īn objective and replicable way to decide between these competing objectives is to maximise some weighted measures of these two parameters. Estimate an unrestricted VAR with all four endogenous variables in their stationary form with a constant. We assume that all four variables are stationary I 0 variables for simplicity. Before we estimate our model, what should we do to ensure that our estimates are not biased? Answer: We use OLS to estimate the VARS so we need to ensure that all variables are stationary to avoid the spurious regression problem associated with unit roots.Ĭheck for stationarity or otherwise of the four variables see Unit Root exercise. Add your thoughts hereTo browse Academia. Response of Industrial Production to an Increase in the Federal Funds Rate Industrial Production is shown to react immediately to an increase in the Federal Funds Rate and this is clearly false in the direction, magnitude, and speed of the change. A better matrix can be constructed that is more in line with economic theory and that eliminates these puzzles, can you think of a better specification of zeros in the contemporaneous affect matrix to get more realistic results? These puzzles could be from ommitted variable biased and most certainly the specification of the contemporaneous affect matrix. This graph reacts instantaneously and in the wrong direction.
The amount of time for Industrial Production to decrease from an increase in the Federal Funds rate is surely longer than one month. Industrial Production is shown to react immediately to an increase in the Federal Funds Rate and this is clearly false in the direction, magnitude, and speed of the change.Īn increase in the Federal Funds Rate tends to lower investment and a decrease in investment reduces industrial output and employment over time. This would imply that an arbitrage opportunity exist for two months which seems unlikely. The problem occurs in the length of time the graph says that the currency depreciates for 2 months.
The response of the Exchange Rate to an Increase in the Federal Funds Rate is a little more ambiguous than the last two example.Īccording to economic theory, a contractionary monetary policy shock should cause the home currency to appreciate Exchange rate to Decreasewhich is what happens in the graph on the previous page. This is consistent since the cost of bank borrowing is an important determinant in the amount of interest banks charge on their loans. Once there is a increase in the Federal Funds rate there is also an increase in the market interest rate. The maximum of the graph occurs at the fourth month and then slowly there is a decay in the federal funds rate. This is consistent with the fact that once the Fed begins increasing interest rates it continues to do so consistently until it has stymied of the threat of inflation. An increase in the Federal Funds rate is statistically significant for up to 10 months. The last four equations can be estimated in EViews but must first be translated into EViews Language and an placed into an Impulse Estimator. Module 5: Session 11: Why a Structural VAR?
The Federal Reserve looks at all these variables when deciding monetary policy in the United States. Since Industrial Production is not contemporaneously affected by financial variables, an upper triangular matrix appears to be the more consistent with economic theory.Īfter all the other option would imply that the Federal Funds Rate is not contemporaneously affected by the market interest rate, exchange rate, or industrial production which is not the case.
SVAR MODEL IN EVIEWS SERIES
Once you have the time series data for these variables you need to upload them into Eviews and follow these steps.
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