VAR model

USING GRETL (or other software if possible): 1. Suppose to evaluate, through a structural VAR model, the dynamic impact of oil price shocks on some macroeconomic variables in a “small open economy”. Let consider the following vector of variables yt = (oilt , inft ,growtht)’, where oilt is the oil price (in domestic currency), inft is the inflation rate (growth rate of the consumer price index), and growth is the growth rate of the gross domestic product. Using the first three series reported in the data set, specify and estimate a VAR model and discuss the propagation mechanism of shocks by calculating structural impulse response functions. Let choose one of the three variables and estimate an appropriate ARMA model, commenting on the differences with respect to the corresponding equation in the VAR model. 2. The Purchasing Power Parity (PPP) states that once converted to a common currency, national price levels should equalize. From a theoretical point of view, if PA and PB are two price indices related to Country A and Country B and EAB is the nominal exchange rate, the PPP relation can be written as PA=EAB*PB Or, when using a log transformation, pA=eAB+pB where lower-case letters denote logs of the variables. From an empirical point of view, if the series are non stationary, one possibility to test for this condition is to refer to the notion of co-integration. Using the series reported in the data-set (already transformed in logarithmic terms), verify first that the variables are non-stationary, and then provide an empirical analysis to confirm the PPP hypothesis. Moreover, through an error correction model, verify the reaction of the three variables to disequilibrium in a “possible” co-integrating relation.



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