Structural VAR Model and Economic Fluctuations

Abstract

A vector autoregressive model(called VAR model) is constructed to investigate behavior of GNP and price in Japan which are influenced by demand and supply shocks. The system model is expressed by
x(t) + A₀x(t) ＋ A₁x(t－1) ＋…＋ A_kx(t－k) ＝ ε(t)
where x is a vector with 4 variables; oil price, unemployment rate, real GNP and price. Responses of shocks ε to the each element of the x-process are considered under the condition such that A₀ is a non-zero matrix. In order to identify the matrix A₀ , structural restrictions are imposed on ”long run multiplier” of the system and such a system is called ”a structural VAR model”. The unit root and cointegration are checked in association with stationarity of the system and impulse responses and variance decomposition are obtained from the identified model.