Impulse response analysis is an important step in econometric analyes, which employ vector autoregressive models. Their main purpose is to describe the evolution of a model’s variables in reaction to a shock in one or more variables. This feature allows to trace the transmission of a single shock within an otherwise noisy system of equations and, thus, makes them very useful tools in the assessment of economic policies. This post provides an introduction to the concept and interpretation of impulse response functions as they are commonly used in the VAR literature and provides code for their calculation in R.
Since the seminal paper of Sims (1980) vector autoregressive models have become a key instrument in macroeconomic research. This post presents the basic concept of VAR analysis and guides through the estimation procedure of a simple model. When I started my undergraduate program in economics I occasionally encountered the abbreviation VAR in some macro papers. I was fascinated by those waves in the boxes titled impulse responses and wondered how difficult it would be to do such reseach on my own.