Lecture 3 Handout - m LR . Then: So: y LR = 0 requires + b...

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Fall 2011 Christina Romer University of California, Berkeley David Romer ECONOMICS 210c/ECONOMICS 236a MACROECONOMIC HISTORY HANDOUT – SEPTEMBER 14 A Two-Variable VAR Suppose the true model is : where ε 1t and ε 2t are uncorrelated with one another, with the contemporaneous and lagged values of the right-hand side variables, and over time. Rewrite this as : or: where This implies : where Π ≡ C -1 B, U t ≡ C -1 E t .
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Extending to K variables and N lags The “true model” takes the form: where: C is K x K, X is K x 1, B is K x K, E is K x 1. This leads to: where Π n ≡ C -1 B n , U t ≡ C -1 E t .
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Two variables, one lag: The reduced form is:
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Simplified Version of Galí Suppose the true model is: Long- run impact of a realization of ε mt of +1 on y: Assume system is such that the impact on m eventually settles down at some level; call this level
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Unformatted text preview: m LR . Then: So: y LR = 0 requires + b 12 = 0. Using the restriction that y LR = 0 intuition: Consider the nonstructural VAR, We saw earlier that So a realization of mt of +1 raises u 1t by /(1 ) and raises u 2t by 1/(1 ). From the coefficients of the nonstructural VAR, compute long-run effects of unit shocks to each of u 1t , u 2t on y. Call these S 1 , S 2 . Then long-run effect of m shock on y = S 1 + S 2 . Thus, the restriction is = S 2 / S 1 . Bernanke and Mihov This implies: where The policy block (with time subscripts omitted for simplicity everything is date t): Example 1: D = B = 0. Then NBR = + v S , so NBR can be used to measure policy shocks. Example 2: D = 1, B = -1. Then one can show FF = - v S /( + ), so FF can be used to measure policy shocks....
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This note was uploaded on 02/28/2012 for the course ECON 210c taught by Professor Romer,c during the Fall '08 term at University of California, Berkeley.

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Lecture 3 Handout - m LR . Then: So: y LR = 0 requires + b...

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