VAR and VEC models are popular forecasting models because they rely on the past history of observed outcomes to predict the expected future values.

(a) Consider the following estimated VAR model:

yt ¼ ^d11yt1 þ ^d12xt1 þ ^v1t xt ¼ ^d21yt1 þ ^d22xt1 þ ^v2t What are the forecasts for ytþ1 and xtþ1?

What are the forecasts for ytþ2 and xtþ2?

(b) Consider the following estimated VEC model:

Dyt ¼ a^11ðyt1 b^1xt1Þ þ ^v1t Dxt ¼ a^21ðyt1 b^1xt1Þ þ ^v2t What are the forecasts for ytþ1 and xtþ1?

What are the forecasts for ytþ2 and xtþ2?