Macroeconomic analysis, Macroeconomics

Assignment Help:

Sims (1980) introduced an exciting and ground-breaking new framework which would prove to be extremely insightful for macroeconomic analysis. This is known as vector autoregression (VAR). The VAR model combines the one variable autoregression with a single-variable linear model and the result, is a model with 'n' equations and 'n' variables. From this, Sims proved that the present value of each variable can be explained by its own lagged values and also current and previous values of the remaining variables in the model. This framework offers a method to capture relationships in multiple time series data. Sims initially thought that this framework could become a key tool for analysing economic policies, forecasting and describing data.

Since his paper the main critique is that, whilst VARs are indeed a useful model for forecasting and data description, one must be extremely careful when interpreting the data. However the idea that the model can analyse policy has been widely disputed. Stock and Watson (2001) analysed the framework which Sims created and they concluded that the VAR model cannot be used to analyse policy as 'economic theory and institutional knowledge is required'. Since the VAR model is a-theoretic, it would not be accurate at analysing economic policies.

An initial glance at historical data and graphswhich have been collected for this study, they indicate that oil price shocks are cyclical and that they occur during most decades and are typified by a sudden increase in the price of oil. These shocks are then followed by a reduction in price as the economy stabilises through time. This sparked the interest of economists and econometricians who were keen to analyse the impacts that these shocks were having on the major economies in the world. As mentioned, oil price shocks appeared cyclical, however from the early 1970's and throughout the 1980's the shocks were occurring much more often.

Buckley (2009) writes that the UK was in recession for several short periods during this time, which placed further emphasis on researchingrelationships between the price of oil and key macroeconomic variables in the hope that once a relationship was found, correct measures could be taken to deal with a future oil price shock. Hamilton (1983) produced a paper which analysed the effects of oil price shocks on Gross National Product (GNP) in the United States of America (USA) using data from the period 1948 to 1972. He concluded that GNP would decrease after a period of a sudden increase in oil prices. Further to this, Hamilton claimed that attributing his results to completely random correlations between the variables would be incredibly naïve and irrational. Hamilton's conclusions were unchallenged and were actually supported by other economists. Significantly Burbridge et al (1984) found similar evidence for this relationship in Japan. The fact that this had been proven in a completely different economy supports Hamilton's idea that one must not assume these correlations are random.


Related Discussions:- Macroeconomic analysis

Money supply.., term paper on determinat and multiplier of money supply

term paper on determinat and multiplier of money supply

The monetary policy of the U.S., I am writing a research paper for my macro...

I am writing a research paper for my macroeconomics class and I am having trouble with it. I am writing on the topic of the monetary policy and i can''t seem to understand a few th

What is money supply, What is Money supply The monetary base is only a ...

What is Money supply The monetary base is only a small part of the total money supply but, through the multiplier effect, the central bank's control over the money supply is ma

How firm produce an output, A firm sells its product in a perfectly competi...

A firm sells its product in a perfectly competitive market where other firm charges a price of $90 per unit. The firm's total costs are C(Q) = 50 + 10Q + 2Q2. How much output shoul

How to evaluate total savings, Q. How to evaluate total savings? Total...

Q. How to evaluate total savings? Total savings Total savings S(r) depends positively on the real interest rate Remember that total saving

Controlling the supply of money, When the reserve requirement changes, whic...

When the reserve requirement changes, which of the following will change in the total banking system?  (Answer change or No Change) Transaction Deposits Total Reserves Req

What are the types of market economies, There are 4 main types of market ec...

There are 4 main types of market economies. They are also called as Economic Systems. The four are Free Market, Mixed Market, Traditional and Command Economy

Var table, From estimating the aforementioned unrestricted VAR, a table of ...

From estimating the aforementioned unrestricted VAR, a table of coefficient and statistics will be produced. From this table, certain statistical information can be analysed, such

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd