E30 - Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data)Return

The article focuses on various aspects of specification, estimation and identification of vector autoregression (VAR) models. Key VAR-specific topics of verification of an estimated model are also covered, as well as the differences between a standard (unrestricted) and structural VAR model. Subsequently, we address theoretical properties and practical aspects of impulse response functions (IRFs) as calculated upon estimated VAR models. Topics such as Cholesky decomposition (CHD), orthogonalised and generalised IRFs are discussed. Properties of VAR models are compared against alternative econometric modelling tools, such as simultaneous equation models and dynamic stochastic general equilibrium (DSGE) models. The article is supplemented with an illustrative example: on an aggregated EMU-wide level, we estimate a VAR (2) model for real GDP, CPI and PPI inflation. IRFs are calculated using two different CHD orderings and compared to generalised IRFs. We find the IRFs from our illustrative model to be very robust against the chosen IRF calculation method and against equation ordering changes.

As regards the frequently mentioned risks connected with the EU entry, we feel that the analyzed macroeconomic data do not confirm that these risks have materialized. The example of the Czech Republic, which joined the EU in 2004, conversely points to an improvement of most macroeconomic indicators following the EU accession, and in fewer cases maintenance of the results from time before the membership. After the EU entry the inflation rate is kept on a low level, real GDP accelerated, economic level of the Czech Republic is increasing towards the EU average, the foreign trade records very positive results, the unemployment rate did not increase, real wages grow, exchange rate of the Czech crown against the euro and USD keeps strong positions, based on the Convergence Program, general government deficit of the Czech Republic has started to reduce after EU accession. As follows from the statistical data, period of intensive preparation of the Czech Republic to join the EU as well as first months of EU membership have rather a positive influence on the competitiveness of the Czech Republic.