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ps2macro2sp06 - estimate it by running separate OLS...

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Econ 387L: Macro II Spring 2006, University of Texas Instructor: Dean Corbae Problem Set #2- Due 1/31/06 You are to update the impulse response functions for real output and unemployment from Blanchard and Quah (1989). A decent treatment of VARs is in an econometrics book by William Greene (2003) Econometric Analysis NY: Prentice Hall, Fifth Edition, Section 19.6 (in particular, p.595-600). 1. Download the real GDP and unemployment data from FRED. Call the log of real output Y t and construct the quarterly unemployment rate as an average of the monthly rates U t . 2. Plot the data Y t and U t . 3. Estimate a VAR with q = 8 (this is a seemingly unrelated regressions model so you can
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Unformatted text preview: estimate it by running separate OLS regressions). If we call the residual vector of the VAR e t = · e ∆ Y t e U t ¸ , then what is the sample var-covar matrix Ω = 1 T − kq e t e t ? 4. Assuming that the “structual" shocks ε t = · ε d t ε s t ¸ are i.i.d with var-covar matrix I and using the identifying restriction that demand shocks have no long run effect on output, what is the implied VMA representation? 5. Plot the impulse response functions for output and unemployment for 1% demand and supply shocks for 40 quarters (see Figs. 1 and 2 in B-Q). 1...
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