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I have an IRF that shows the GDP shock to GDP.

Let's say I have a 5-year forecast of GDP. If there is an immediate 1% decrease in GDP today, can I adjust the original 5-year forecast by using the IRF?

e.g., GDP forecast in year 3 is 500 USD. The IRF says a 1% decrease in GDP will cause a 0.1 % decrease in year 3. Can I simply adjust the forecast downwards by 0.1% to to 499.5 USD?

Thank You

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  • $\begingroup$ From what kind of model was the IRF obtained? If univariate, then your approach is likely correct. If multivariate, you'd need to assume that the initial drop was actually caused by that specific type of shock for which IRF was computed (since the model would include several types of shocks, with different impacts on GDP). $\endgroup$
    – ivansml
    Feb 21, 2015 at 1:17
  • $\begingroup$ Thanks for your help, @ivansml! This is indeed a multivariate model / VAR. $\endgroup$
    – Abraham
    Feb 21, 2015 at 11:42

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