How do I interpret the Impulse Response reaction functions in the
For those of you who are good in TIME SERIES ANALYSIS.
1. Please help me with interpreting the impulse response reaction functions
generated from estimating a VAR model. I understand the X-axis (vertical
line) represents the time period (months, quarters, years etc.). What does
the Y-axis (vertical line) represent? Is it percentage points, percentage
changes, unit change or what?
2. What about reading the function itself? Normally the interpretation goes
like €“ a one standard deviation shock (increase) in one variable (say money
supply) will cause another variable (say interest rate) to respond (
increase) by so much (reading from the Y-axis). Now what is this one
standard deviation in terms of percent point? i.e how do I convert the one
STD in to percentage point so that the interpretation would go like €“ one std
increase (which is so much percentage point increase) in money supply would
lead to so much increase/decrease (the amount shown in the Y-axis) in
interest rate. The point is one €śstandard deviation shock€ť sounds too
technical for most policy makers.
Thanks to all of you
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