I ran my VAR model with inflation, real gdp, a proxy for fiscal policy and a policy indicator. I used the function
externalinstrument in R and followed this tutorial to derive IRFs.
After transforming all the variables to induce stationarity (first or second differencing), I ran the VAR and got the following IRFs (1 standard deviation shock):
As you can see the IRs don't behave as nicely and smoothly as in usual IRF applications. Especially, real GDP follows a very weird path (it increases when it should be decreasing and it's not mean reverting but it rather follows a random walk). The policy indicator as well decreases initially while it should be increasing. Any idea why this is happening and what I can do to correct it?