VAR

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VAR

• Malgorzata Bednarek
• Maria Derezinska
• Magdalena Sadowska

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Theory
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About VAR

• Sims critique
• Validity of interrelated analytical exercises
  (common in reality where everything depends on
  everything) implicit incorrect analysis of
  applications if econometric inquiry is dependent
  on prior theoretical restrictions
• Vector autoregression (VAR model) is possible
  to deal with dynamic relationships between
  macroeconomic variables, where causality may be
  mutual
• Vector autoregression
• xt ?1xt -1...?kxt -kFDt et
• et NID(0, O)

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Applications of vector autoregressions

• Forecasting
• VAR models allow complete flexibility in
  specifying the correlation between future,
  present and past
• Causality tests
• Granger tests
• Sims tests
• Both tests are implications of the same null
  hypothesis. In the model joint significance of
  all lags except the lags of variable supposed to
  be a cause is tested
• Hypothesis-seeking
• Data characterization
• Impulse response analysis
• Monetary and fiscal policy analysis

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VAR diagnosis

• Testing for number of lags
• Testing for VAR stability
• Testing for Granger causality
• Testing for autocorrelation

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Empirical results
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Model

• In our model we analyze the potential for lending
  and consumption booms in Hungary
• DATA SOURCES
• OECD Maxdata database,
• extension of papers Brzoza-Brzezina (2004) and
  Susan Schadler, Zuzana Murgasova, Rachel van
  Elkan (2004 )
• DATA quarterly dataset for Hungary for period
  1996-2004
• 1. lloan - logarithm of total nominal loans to
  the private sector
• 2. lrate - logarithm of Nominal interest rate
• 3. lgdp - logarithm of GDP at constant prices
• 4. lcon - logarithm of Private Consumption, Volume

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Vector Autoregression for Hungary with
consumption (quarterly dataset October 1995 - May
2004)
var lloan lrate lgdp lcon, exog(_q) Parameter
s of VAR model in standard form have no
structural interpretations !!
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Table 1 Testing for number of lags varsoc
lloan lrate lgdp lcon, maxlag(3)
Source OECD maxdata 2004
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Table 2 Testing for VAR stability varstable
Source OECD maxdata 2004

• All the eigenvalues lie inside the unit circle,
  which means that VAR satisfies stability
  condition.

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Table 3 Testing for autocorrelation vargranger
Source OECD maxdata 2004

• In this test a 0 hypothesis tells that there is
  no autocorrelation at lag of order j.
• We test it at the 5 level so the p-values
  bigger than 0,05 means that there is no
  autocorrelation in the model.

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Table 4 Testing for Granger causality varlmar
Source OECD maxdata 2004
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Graph 1 The temporal change of consumption in
Hungary (impulse- lcon, response- lloan) varirf
graph irf, i(lloan) r(lcon)
Source OECD maxdata 2004
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Graph 2 The permanent change of consumption in
Hungary (impulse- lcon, response- lloan) varirf
graph oirf, i(lloan) r(lcon)
Source OECD maxdata 2004
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Graph 4 Trend line of interest rate since 1995q4
and prediction for period (2004q1 till 2008q2)
Source OECD maxdata 2004
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Graph 5 Trend line of a number of loans since
1995q4 and prediction for period (2004q1 till
2008q2)
Source OECD maxdata 2004
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Graph 6 Trend line of GDP since 1995q4 and
prediction for period (2004q1 till 2008q2)
Source OECD maxdata 2004
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Graph 7 Trend line of consumption since 1995q4
and prediction for period (2004q1 till 2008q2)
Source OECD maxdata 2004
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Graph 8 Predicted trend lines for consumption
and loans for period 2004q1 till 2008q2
Source OECD maxdata 2004 Both trend lines seem
to be very stable. While consumption is slightly
increasing the predicted amount of loans stays
fairly constant and with hardly noticeable the
tendency to decrease.
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Table 5 Comparison between data on consumption
and prediction (quarterly dataset January 2004 -
October 2004)
  January 04 April 04 July 04 October 04
OECD data 5,00739 5,01837 5,02886 5,03924
Prediction 5,00739 5,01784 5,01058 5,00267
Standard Error 0 0,000106 0,003635 0,007257
Source OECD maxdata 2004
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Arguments for no lending boom

• There is no empirical evidence for the near
  future threat according a possible lending boom
  in Hungary.
• Undoubtedly , after the EURO adoption, the
  interest rate will have to accommodate to the one
  in EMU but some adjustments have already been
  accomplished.
• There is smaller deviation from the interest rate
  of EMU
• Hungary still have less developed financial
  market than the old member state
• Forecast is based on the internal outcome of the
  past events in Hungary. Awareness of an external
  shock or unexpected twist in domestic economy is
  the key issue for ruling elites.

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The endNow is time for applause! ?