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.