Question 1:
a) Explain what is a VAR giving an example both in the form of an equation and matrix. Discuss its benefits and limitations.
b) How can we estimate a VAR involving equations having a contemporaneous feedback term?
c) Distinguish between variance decomposition and impulse response functions.
Question 2:
(a) What are the two types of non-stationarity that exist and show how one of them can be made stationary?
(b) How do we test for a unit root?
(c) What does it mean when two variables are cointegrated?
(d) Using the Engle-Granger approach show how parameters can be estimated in cointegrated systems.