VAR Magorzata Bednarek Maria Dereziska Magdalena Sadowska Theory

VAR Małgorzata Bednarek Maria Derezińska Magdalena Sadowska

Theory

About VAR n Sims critique Validity of interrelated analytical exercises (common in reality where everything depends on everything) implicit incorrect analysis of applications if econometric inquiry is dependent on prior theoretical restrictions Vector autoregression (VAR model) is possible to deal with dynamic relationships between macroeconomic variables, where causality may be mutual n Vector autoregression xt =Π 1 xt -1+. . . +Πkxt -k+ΦDt +εt εt ~NID(0, Ω)

Applications of vector autoregressions n n Forecasting VAR models allow complete flexibility in specifying the correlation between future, present and past Causality tests ü ü n n Granger tests Sims tests Both tests are implications of the same null hypothesis. In the model joint significance of all lags except the lags of variable supposed to be a cause is tested Hypothesis-seeking Data characterization Impulse response analysis Monetary and fiscal policy analysis

VAR diagnosis • Testing for number of lags • Testing for VAR stability • Testing for Granger causality • Testing for autocorrelation

Empirical results

Model n In our model we analyze the potential for lending and consumption booms in Hungary n DATA SOURCES: OECD Maxdatabase, extension of papers: Brzoza-Brzezina (2004) and Susan Schadler, Zuzana Murgasova, Rachel van Elkan (2004 ) n n n DATA: quarterly dataset for Hungary for period 1996 -2004 n 1. lloan - logarithm of total nominal loans to the private sector 2. lrate - logarithm of Nominal interest rate 3. lgdp - logarithm of GDP at constant prices 4. lcon - logarithm of Private Consumption, Volume n n n

Vector Autoregression for Hungary with consumption (quarterly dataset October 1995 - May 2004) var lloan lrate lgdp lcon, exog(_q*) Parameters of VAR model in standard form have no structural interpretations !!

Table 1: Testing for number of lags varsoc lloan lrate lgdp lcon, maxlag(3) Source: OECD maxdata 2004

Table 2: Testing for VAR stability varstable Source: OECD maxdata 2004 n All the eigenvalues lie inside the unit circle, which means that VAR satisfies stability condition.

Table 3: Testing for autocorrelation vargranger Source: OECD maxdata 2004 n n In this test a 0 hypothesis tells that there is no autocorrelation at lag of order j. We test it at the 5% level so the p-values bigger than 0, 05 means that there is no autocorrelation in the model.

Table 4: Testing for Granger causality varlmar Source: OECD maxdata 2004

Graph 1: The temporal change of consumption in Hungary (impulse- lcon, response- lloan) varirf graph irf, i(lloan) r(lcon) Source: OECD maxdata 2004

Graph 2: The permanent change of consumption in Hungary (impulse- lcon, response- lloan) varirf graph oirf, i(lloan) r(lcon) Source: OECD maxdata 2004

Graph 4: Trend line of interest rate since 1995 q 4 and prediction for period (2004 q 1 till 2008 q 2) Source: OECD maxdata 2004

Graph 5: Trend line of a number of loans since 1995 q 4 and prediction for period (2004 q 1 till 2008 q 2) Source: OECD maxdata 2004

Graph 6: Trend line of GDP since 1995 q 4 and prediction for period (2004 q 1 till 2008 q 2) Source: OECD maxdata 2004

Graph 7: Trend line of consumption since 1995 q 4 and prediction for period (2004 q 1 till 2008 q 2) Source: OECD maxdata 2004

Graph 8: Predicted trend lines for consumption and loans for period 2004 q 1 till 2008 q 2 Source: OECD maxdata 2004 Both trend lines seem to be very stable. While consumption is slightly increasing the predicted amount of loans stays fairly constant and with hardly noticeable the tendency to decrease.

Table 5: Comparison between data on consumption and prediction (quarterly dataset January 2004 - October 2004) January 04 April 04 July 04 October 04 OECD data 5, 00739 5, 01837 5, 02886 5, 03924 Prediction 5, 00739 5, 01784 5, 01058 5, 00267 Standard Error 0 0, 000106 0, 003635 0, 007257 Source: OECD maxdata 2004

Arguments for no lending boom n n n There is no empirical evidence for the near future threat according a possible lending boom in Hungary. Undoubtedly , after the EURO adoption, the interest rate will have to accommodate to the one in EMU but some adjustments have already been accomplished. There is smaller deviation from the interest rate of EMU Hungary still have less developed financial market than the old member state Forecast is based on the internal outcome of the past events in Hungary. Awareness of an external shock or unexpected twist in domestic economy is the key issue for ruling elites.

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