Consider the model discussed in the tutorials and used by Nicholas Bloom to identify uncertainty shocks. The model is a vector autoregressive model with 12 lags on the endogenous variables.

(i)Write down the reduced form and the structural form of the VAR model. (7 marks)

(ii) Suppose a researcher aims to identify the uncertainty shock using the recursive identification approach. According to this approach, which variables are allowed to contemporaneously respond to the uncertainty shock? Which variables are allowed to respond to the shock after one or more lags? (8 marks)

(iii) Can you think of a way of testing the restrictions introduced by the recursive identification approach, in order to assess if they are supported by the data? (10 marks)

2. Question 2 (25 Marks) Consider the model discussed in the tutorials and used by Nicholas Bloom to identify uncertainty shocks. The model is a vector au- toregressive model with 12 lags on the endogenous variables y = S&P 500 VXO federal funds rate wages CPI hours, employment industrial production, (i) Write down the reduced form and the structural form of the VAR model. (7 marks) (ii) Suppose a researcher aims to identify the uncertainty shock using the recursive identification approach. According to -3- See Next Page this approach, which variables are allowed to contempora- neously respond to the uncertainty shock? Which variables are allowed to respond to the shock after one or more lags? (8 marks) (iii) Can you think of a way of testing the restrictions introduced by the recursive identification approach, in order to assess if they are supported by the data? (10 marks) 2. Question 2 (25 Marks) Consider the model discussed in the tutorials and used by Nicholas Bloom to identify uncertainty shocks. The model is a vector au- toregressive model with 12 lags on the endogenous variables y = S&P 500 VXO federal funds rate wages CPI hours, employment industrial production, (i) Write down the reduced form and the structural form of the VAR model. (7 marks) (ii) Suppose a researcher aims to identify the uncertainty shock using the recursive identification approach. According to -3- See Next Page this approach, which variables are allowed to contempora- neously respond to the uncertainty shock? Which variables are allowed to respond to the shock after one or more lags? (8 marks) (iii) Can you think of a way of testing the restrictions introduced by the recursive identification approach, in order to assess if they are supported by the data? (10 marks)