Including Taylor rule type equation in VAR

[atanu.rakshit]

Hi,
I am new to Eviews and I am trying to estimate a VAR in 5 economic variables (interest rates, unemployment, exchange rates, inflation and a stock market factor). I was wondering if there is any way of introducing a contemporaneous structural restriction in my VAR in the form of a Taylor rule. That is, the interest rate equation will depend contemporaneously and deterministically (coefficients will be given) on a inflation gap measure and a output gap measure as well as lagged values of all variables including itself. Will really appreciate any help on this. Thanks.

Sai

[trubador]

For a more general use of multi-equation modeling in EViews, you can try SUR models under System Estimation Methods. However, you will lose some of the features that are available only for the VAR object. Having said that, I think you should derive a feasible reduced form for your VAR analysis, since such contemporaneous relationships are the main scope of VAR modeling. If the contemporaneous relationship is that much deterministic, then you can treat it as an exogenous variable (gt). Unfortunately, even in that case, VAR framework may not be useful and you will have to use another kind of modeling like SUR.