### SVAR with long run restriction (Blanchard & Quah 1989)

Posted:

**Tue Aug 15, 2017 9:21 am**Hi,

I am using Blanchard & Quah (1989) long run restrictions on structural bivariate model with output growth (gdp_growth) and inflation (gdp_deflator) as the variables. The restrictions imposed is that supply shock (structural innovation relation to output growth) will have long term impact on both variables while the demand shock (structural innovation relating to inflation) will have no long run impact on output growth. But both shocks will have long run impact on price. So instead of defining A and B matrix in this case, I presume that I shall define long term pattern (matrix_lr) with NA,0,NA,NA elements. The eviews will then give me elements of matrices A and B which I have used to create matrix_a and matrix_b. Similarly, error terms e1 and e2 are generated using Make Residuals command after running Unrestricted VAR with lag 1. I have attached an eviews file that contains 9 worksheets, the first being the panel data followed by separate worksheet for each South Asian countries. For our case, we will take the example of Pakistan (PAK):

My queries are as follows:

1. I am using Eview 9 and please confirm if the steps followed so far in eviews are correct or not.

2. If it is correct, please guide me on how to generate structural shocks u1 (supply shock corresponding to output) and u2 (demand shock corresponding to inflation) in eviews from e1, e2 and matrices A & B. Please provide navigation instead of command as I am not good at latter;

3. The purpose of the above exercise is to compare symmetries of shocks across countries in the region to assess suitability for optimum currency area (Bayoumi & Eichengreen 1994). Please guide if the correlation of supply shock and demand shock across countries can be generated from eviews?

4. How to calculate size of disturbances (defined as long run effect on output from the IRF for supply shocks and sum of the first year's impact on output and prices for demand shocks) and speed of adjustment (response after 2 years as a share of the long run effect) for each country?

x. Can we run SVAR on panel data? I compiled all the data in a panel form thinking that Eviews will run SVAR on panel data thereby simplifying the process and saving time and efforts.

Your guidance in addressing above issues would be highly appreciated.

Best regards.

I am using Blanchard & Quah (1989) long run restrictions on structural bivariate model with output growth (gdp_growth) and inflation (gdp_deflator) as the variables. The restrictions imposed is that supply shock (structural innovation relation to output growth) will have long term impact on both variables while the demand shock (structural innovation relating to inflation) will have no long run impact on output growth. But both shocks will have long run impact on price. So instead of defining A and B matrix in this case, I presume that I shall define long term pattern (matrix_lr) with NA,0,NA,NA elements. The eviews will then give me elements of matrices A and B which I have used to create matrix_a and matrix_b. Similarly, error terms e1 and e2 are generated using Make Residuals command after running Unrestricted VAR with lag 1. I have attached an eviews file that contains 9 worksheets, the first being the panel data followed by separate worksheet for each South Asian countries. For our case, we will take the example of Pakistan (PAK):

My queries are as follows:

1. I am using Eview 9 and please confirm if the steps followed so far in eviews are correct or not.

2. If it is correct, please guide me on how to generate structural shocks u1 (supply shock corresponding to output) and u2 (demand shock corresponding to inflation) in eviews from e1, e2 and matrices A & B. Please provide navigation instead of command as I am not good at latter;

3. The purpose of the above exercise is to compare symmetries of shocks across countries in the region to assess suitability for optimum currency area (Bayoumi & Eichengreen 1994). Please guide if the correlation of supply shock and demand shock across countries can be generated from eviews?

4. How to calculate size of disturbances (defined as long run effect on output from the IRF for supply shocks and sum of the first year's impact on output and prices for demand shocks) and speed of adjustment (response after 2 years as a share of the long run effect) for each country?

x. Can we run SVAR on panel data? I compiled all the data in a panel form thinking that Eviews will run SVAR on panel data thereby simplifying the process and saving time and efforts.

Your guidance in addressing above issues would be highly appreciated.

Best regards.