This answer is based on notation from Makridakis et. al textbook on forecasting. I would assume it is similar in any standard textbooks on transfer function modeling. I would also check out excellent text by Alan Pankratz on transfer function modeling as the following answer is motivated by excellent graphics in these two books. I'm using a notation called $r,s,b$ in transfer function equation you need to understand this from the reference text books for you to understand the material below. I have summarized them below:
- $r$ is the number of denominator terms. (what is the decay pattern - rapid or slow?)
- $s$ is the number of numerator terms. (when does the effect happens ?)
- $b$ is the how much delay in taking effect.
A general transfer function takes the form:
$$Y_t = \mu + \frac{(\omega_0-\omega_1B^1- .....-\omega_sB^s)} {1-\delta_1B^1 - ...\delta_r B^r} X_{t-b}+e_t$$
It might help to put your coefficients in an equation format as shown below. Also consider $Y_t$ as Sales and $X_t$ as promotion/advertisement at time $t$ for easy understanding.
In your case $r$=1, $s$=2 and $b$ = 0
$$Y_t = \mu + \frac{(\omega_0-\omega_1B^1-\omega_2B^2)} {1-\delta B} X_t+e_t$$
where $e_t$ is an $AR(1)$ process. $\mu$ is the constant/level and $\omega$ is the numerator coefficients and $\delta$ is the denominator coefficient.
Applying your coefficients to the above equation translates to:
$$Y_t = 4200 + \frac{(30 + 15B^1- 1.62 B^2)} {1-0.25B} X_t+e_t$$
The numerator denotes the moving average (moving average) part and denominator denotes the auto regressive part of the transfer function. Think of numerator as when the effect starts and denominator will control the decay of the numerator factor. IT might further help to break down just the transfer function in an additive format using basic algebra to illustrate the effects.
$$\frac{30} {1-0.25B}X_t + \frac{15B^1} {1-0.25B}X_t - \frac{1.62B^2} {1-0.25B}X_t $$
I used SAS to do most of my calculations(see this website). Now performing recursive calculation on the first part of equation as noted in the website translates to the following figure. What this tells you is that Advertisement at time $t = 0$ causes 30 incremental units in Sales all things being equal. This advertisement also has an effect in subsequent periods example at $t = 1$ the effect is 7.5 incremental units, and so on caused by denominator coefficient $\delta = 0.25$.
The second part and third part of the transfer function, by applying recursive calculation translates to following chart. For the second part notice that sales at $t=0$ equates to 15 unit of sales lag 2 and decays further. For third part of numerator causes sales to decline by -1.62 units at lag 3 and decays further.
Combining all the 3 parts of transfer function additively using basic algebra translates to the final form as shown below:
What this tells you is that advertisement at $t=0$ causes 30 units of sales at $t=0$ and 22.5 units of sales at $t=1$ and rapidly decreases to 4 units of sales at $t=2$ and so on ....
Lets see what happens if you change the denominator coefficient from 0.25 to 0.70 and keeping the numerator as 30. By the way the following equation is a simple form of transfer function that works very well in practice is also called infinite distributed lag model or Koyck lag model.
$$\frac{\omega_0} {1-\delta B}X_t => \frac{30} {1-0.70B}X_t$$
This would be represented as the following figure, as you can see the decay is very slow due to the decay factor increased from 0.25 to 0.70.
Hope this is helpful. I have learnt thru experience that visualization is the only way you can explain transfer function to a non technical audience including me.A practical suggestion, I would recommend conducting experiments on data due to the fact that this could be just illusions as noted by Armstrong. If possible, I would do experimentation of your "causal" variable to establish the "cause and effect". Also I don't know why your numerator 3 is -1.62, it could be just spurious.
Please provide feed back if you find this post useful as it took some effort to respond to this answer.I learnt the visualization of transfer function in this website thanks to @javlacalle.
. Expressing it as a "regression model" we get
