I recently started working with EViews and I really wanna express my gratitude to dakila for providing the FAVAR add-in to us and moderating this thread with helpful support.
After running the FAVAR add-in with my own dataset I came across a point that kind of surprised me. I crosschecked the FAVAR example file and found the same (potential?) issue again. Hopefully it is just me having a false understanding of the FAVAR theory, so I would really appreciate some feedback from you guys here or even from you dakila.
The point I wanna talk about relates to the irf matrix (“irfxmat”) that gets saved in the workfile when you add “save=1” to the favar command. In the standard specification of the example file the first entries in the irf matrix are always different from zero. Some are very small, yes, but they are never equal to zero. But shouldn’t the impulse responses of the slow moving variables (in the example file series16, 108, 17, 49, 50, 51, 26, 48, 118) by definition be unaffected by a shock in the federal funds rate in the first period? The irf graphs of the respective series do not start in zero but somewhere slightly above or below accordingly. I mean, the whole differentiation between slow and fast moving variables implies that the slow variables do not immediately react to shocks in the faster ones within the first period. That’s why they are slow right?
I found an EViews FAVAR tutorial by the Bank of England (https://cmi.comesa.int/wp-content/uploads/2016/03/Ole-Rummel-13-Feb-Exercise-on-factor-augmented-VARs-EMF-EAC-9-13-February-2015.pdf
) and this tutorial ends up with an irf matrix in which the first entries of all slow moving variables are precisely equal to zero. To me this makes sense.
I really hope that someone out here or maybe even dakila himself could state his or her opinion on this topic. Any help would be very much appreciated.
Thanks in advance and best regards