Question: Illustrate the impulse response functions for the bivariate VAR model. To illustrate how impulse response functions operate, we consider the simulated sequences model without the

Illustrate the impulse response functions for the bivariate VAR model. To illustrate how impulse response functions operate, we consider the simulated sequences model without the intercept of the type t t-1 t Z = ???? Z + w , where t t

t y

Z =

x

???? ????

???? ????

???? ????

, and 1t t

2t w ????

????

???? ????

???? ???? ????

???? ????

. Here, it is given that 1.6 1.4

???? =

1.3 1.5

???? ????

???? ????

???? ????

. Obtain the impulse responses functions, show your results graphically, and explain the effects of shocks to the variables from your graphs.

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