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Journal of Economic Perspectives: Vol. 15 No. 4 (Fall 2001)

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Vector Autoregressions

Article Citation

Stock, James H., and Mark W. Watson. 2001. "Vector Autoregressions." Journal of Economic Perspectives, 15(4): 101-115.

DOI: 10.1257/jep.15.4.101

Abstract

This paper critically reviews the use of vector autoregressions (VARs) for four tasks: data description, forecasting, structural inference, and policy analysis. The paper begins with a review of VAR analysis, highlighting the differences between reduced-form VARs, recursive VARs and structural VARs. A three variable VAR that includes the unemployment rate, price inflation and the short term interest rate is used to show how VAR methods are used for the four tasks. The paper concludes that VARs have proven to be powerful and reliable tools for data description and forecasting, but have been less useful for structural inference and policy analysis.

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Authors

Stock, James H. (Harvard U and NBER)
Watson, Mark W. (Princeton U and NBER)

JEL Classifications

C32: Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions

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