Im currently reading up on Vector Auto Regression models however I cant wrap my head around how you set a model to describe a variable. My goal is it use interest rate, imports and exchange rate to describe GDP but I cant seem to understand how three regressions describe GDP?

I'd assume that you start by using these regerssions with 1 lag i.e., VAR(1) and three variables

$y_1 = A_1 + b_1 y_{1,1-t} + e_{1,t}$; interest rate
$y_2 = A_2 + b_2 y_{2,1-t} + e_{2,t}$; imports
$y_3 = A_3 + b_3 y_{3,1-t} + e_{3,t}$; exchange

and when you have made these with appropriate amounts of lags in R software how do you use these to decribe the GDP?
Because as I understand it, VAR models describe one exogenous variable by using X amounts of endogenous variables with their own seperate regressions to describe another variable.

I'm currently drawing blanks and my statistics skills are very rusty at this point.

How does this actually work and how do you apply it using equations?


Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.