Urgent question about Cholesky Ordering

[thomas-2424]

Hi,

I was wondering whether you could answer a quick question on Cholesky ordering. I am trying to run a SVAR and I need to correctly order my variables in terms of contemporaneous effects. If I want output to contemporaneously affect interest rates, but not interest rates contemporaneously affect output, when I dictate the Cholesky order in the impulse response part of Eviews, should I write:

Cholesky order: interest rate, GDP

Or Cholesky order: GDP, interest rate

I appreciate your help.

Thanks

Tom

[tslay]

Hi there,

I was looking for the answers to this question as well. Here's what I was told - hope it helps:

When you run the variance decomposition using Cholesky decomposition, the results will tell you which variable affects which contemporaneously. The Cholesky decomposition uses a lower triangular matrix so the error term with 100% in the first period does the affecting, I believe.

Cheers.