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However, these results should be approached with due caution. The limitations and problems associated with VAR modelling have been outlined in this paper, therefore these observations should not be used to interpret or analyse any form of policy nor should they be used solely to forecast the impact of future price shocks as much more prior information is required to do so. However the results do provide a solution to the aim and initial problem discussed. There is significant evidence of a negative relationship between an oil price shock and the UK macroeconomy, in one direction.
A further extension to this study might have been to analyse the forecast error decomposition. This may have shown the percentage of unanticipated changes in each of the variables could have been explained by the shocks thus providing a more concrete understanding of exactly how much oil price shocks impact upon the other variables.
How much will your firm's total revenues (revenues from both products) change if you increase the price of good X by 2 percent?
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