Vector Autoregressions Model

a vector
Autoregressions:

could the model economic mariables such

· we use MR
forecast key
to as:

II
3
inflation Rate

Rate
ofunemployment
21

(3)
growth
Rate
ofGDP
(4) interest
R ates

model
lagged
set which the
vector
Autoregression VR time values
A a a a
regressions;
series
of
· series are
regressors of
is in

model extends the model a

A
autoregression rector time-seriesvariables.
w i re univariate to matrix
of
·

the and called

oflags
When the in each is the to this
number
equal MR(P)
same
equations system ofequations
or
·

of pc is a

consider the variables;4* the models

·
for simplicity; we case a-time
of
series
*s: mrcps consists 2
of equations:

a YPot Piet... pip 4,Xe+... Up*z-p kit

+ + + +

(2) XtPot
PE-st... Rpt-p
+ +

k, xt- s+...+Yp*t-p+Yat

the confficients ofaw a r

are
estimated by estimating each
equation by ous

words
I note:n o model
only works
Ix+34
are
endogenous C
cory , t 0,
=
in other
they are

determined win the model

I for ex in micro:
Ifwe
set
mis-mas we can obtain Q* c
endogenous

in looka tthe phillips curve;then Asy4=> unempv

& be 4 inflation"
ifhe
c macro -
=
 model
· So A
R of 2 time-series mariables; and XI;consists ofequations.

. in
. all dependentmirble t
is

· in (2) the dependantmariable x=

is

The
·
regressors
in both
equations are
lagged values
of
both mariables.

general;where there atime

· in are seriesmriables

The model for

. . new will consist
ofa equations; one each
ofthe marbles

· And the
regressors
in All
equations Are
lagged values
of
All the mariables.

Determining Lag Lengths in vars:

intercept
M

have model model

c
if we a
wa r w scariables 2 Y
lags ( in one we estimate 3x4+1 al
conficients
to estimate

I since we have suriables, we have sequitions.

to estimate total.
I
so 21x5 105 =

coefficients in

c
estimating All these
coefficients vbf (number
of
obs.) I estimation error
ofaforecast

do determine which include the model have to thata ll the variables

a
practically mariables to in WAR we make some

Are related.

C.
for ex: economic
theory suggests thatt he
inflation rate, unemploymentrate, a short-term

related
interest
rate are
together

that these could help

suggesting variables
C..

forecastone Another in A
WA r.

include undated mar;introduces predictive

uriable
adding content;
if
o we an in A An estimation error wont

thereby u
forecastaccuracy.
 model the Rates and
C A
R
o ofInflation unemployment:

and the
a
consider A 2 mriable
for inflation
VR rate,
Futy, unemploymentRate, Unempt

but has stochastic trend

a since
info non-stationary
is (it a

3. So iti s
Appropriate transform by computing
it its
firstdifference
to

into

the and
3 so hr
for it, unemp consists
of2 equations:

So one
for in.As the
dependentvariable
· And the other
for uneras the dependentvariable.