## Impulse Response Functions and Variance Decompositions

Impulse response functions show the effects of shocks on the adjustment path of the variables. Forecast error variance decompositions measure the contribution of each type of shock to the forecast error variance. Both computations are useful in assessing how shocks to economic variables reverberate through a system.

Impulse response functions (IRFs) and forecast error variance decompositions (FEVD) can be produced after using the var or vecm commands. The results can be presented in a table or a graph.

Obtaining the impulse responses after estimating a VAR is easy in gretl. The first step is to estimate the VAR. From the main gretl window choose Model>Time series>Vector Autoregression. This brings up the dialog, shown in Figure 13.13...

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