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Interest Rates (R) - I feel that it is important to include a variable which represents the monetary sector of the economy because those inflationary pressures which are expected to be present post oil price shock are likely to impose pressures onto the monetary demand in the economy. Therefore Interest Rates (R) will be incorporated into the VAR model. From this we cannot examine monetary policy, due to the features of the VAR model. However we are able to observe changes in the rate of interest following an oil price shock.The Interest Rates statistics are calculated as the mean average throughout each quarter.
Sims (1980) introduced an exciting and ground-breaking new framework which would prove to be extremely insightful for macroeconomic analysis. This is known as vector autoregression
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trying to figure out how this works as I have two classes currently statistics/economics an
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