Pros and cons of var, Macroeconomics

Assignment Help:

Since their inception, VAR models have been at the centre of many controversies associated with econometric modelling. The recurring criticism throughout history is due to the model being a-theoretic. There is not an underlying theory which is attached to the model therefore it incorporates no prior information. Asteriou and Hall (2011) argue that since there are no initial restrictions on the models parameters, one could deduce that all variables have an effect on everything. However, statistical inference, namely, causality testing can be used to eliminate those variables which are deemed insignificant from the model. Another problem which can occur when using VAR is that the parameters will consume much of the degrees of freedom, insist Gujarati & Porter (2009). For example; if we had a 4 variable model and had chosen to use 8 lags, 32 lagged parameters will exist, which in addition to the constant would total 33. Should the sample size not be sufficiently large, the parameters will use too many degrees of freedom. This will lead to problems withthe estimation.

Finally, VAR cannot be used for policy analysis due to the lack of prior information and a-theoretic nature of the VAR model; therefore the results are incredibly problematic to interpret. However there are methods to overcome this problem. Supporters of the model suggest estimating the impulse response functions thus ascertaining the effects on the variables, should one of them be subject to a shock. There are some advantages to using VAR models. They are very simple to setup. Econometricians need not worry about which variables are endogenous and which are exogenous i.e. originating within or outside the model. Additionally the estimation is extremely simple; each equation can be estimated using the standard OLS method.


Related Discussions:- Pros and cons of var

Assingment, a complete demend funtion equation

a complete demend funtion equation

Economists finance manager functional areas of MANAGEMENT, The primary func...

The primary functions of economists are to teach, contribute research and empirical findings and formulate policies. Most of the professional economists are associated with academi

Strategy for p1 in this game, P2 and P3 play with a penny. P1 picks between...

P2 and P3 play with a penny. P1 picks between same (S) and different (D). After observing P1's choice, P2 and P3 get to picked Simultaneously independently either head (H) and tail

Secondary effects in addition to the direct effect, Subsidy programs are li...

Subsidy programs are likely to have a number of secondary effects in addition to the direct effect on dairy prices. What impact do you suppose farm subsidies are likely to have on

List of major emerging-market economies, List of major emerging-market econ...

List of major emerging-market economies To determine if the UK is to benefit from growth of emerging-market economies in the future, it should start exporting goods and specif

Quantity theory of money, what is the importance of the quantity theory of ...

what is the importance of the quantity theory of money

Mean and variance, Compute the mean and variance of the following discrete ...

Compute the mean and variance of the following discrete probability distribution. Where X=2, and P(x)=.5. Where X=8 and P(X) .3. Where X=10 and P(X) =.2.

Balance of trade, Balance of T rade A country's present accoun...

Balance of T rade A country's present account reflects a money drain when exports exceed imports. The net distinction in-between the dollar value of a world imports an

What is a monopoly, When single business or corporation dominates its area ...

When single business or corporation dominates its area and squeezes out all its competition, the result is the consumer does not have a open choice, and inevitably, the price of it

Goods market and factors market, Goods Market and Factors Market: Good...

Goods Market and Factors Market: Goods  market  is  the  market  where  goods  are  bought  and  sold  for  the  purpose  of consumption Factors markets are the markets

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