Impulse Response Essay

Submitted By rosaluoxia
Words: 360
Pages: 2

Similar to the pair of STOCKPRICE and CPI, includes all different pairs of the four variables: STOCKPRICE, CPI,OUTPUT AND INTEREST.
The equation above checks the effect at time t=0,1,…of a unit shock to variables at time 0. Iterate the procedures above until = 0, which means the shock disappear at time t. An impulse response graph (Appendix 20) is obtained by running impulse responses based on VAR with these four variables(5 lags). From the graph, it is indicated how long and to what degree that 1 unit shock at time 0 on one variable influence the other variable. The blue line shows the change of the shock effect and red lines are standard errors range. Some typical impulse responses are explained as following: In terms of the Response of Stockprice to Stockprice, 1 unit shock on stockprice at time 0 has a big positive impact on the stockprice itself at first. Then this influence goes down as time goes on. But within the time period of the test (10 periods), the shock effect doesn’t disappear. Speaking of the Response of Stockprice to Interest rate, 1 unit shock on stockprice at time 0 starts and has a small negative impact on interest rate later. This effect becomes bigger at t=2, but decreases and equals 0 between t=3 and t=4. After that the shock has a positive effect on interest rate and doesn’t disappear within the time period of the test (10 periods). Talking about the Response of CPI to Output, 1 unit shock on CPI at time 0 starts and has a small…