Introduction and hypothesis
The aim of this report is to give way the nature of the long term relationship that exists between the evolutions of the fiscal grocerys and the economic performance of a country. For this purpose we chose to focus on Germany in 2007-2009, when the last financial crisis took place. The indicators we routined for financial markets ar the consumer price index (cost-of-living index) and a broad stock market index. While to mea legitimate the economic performance of Germany we workoutd deuce macroeconomic indicators: GDP and the rate of unemployment.
Because the direction of this relationship is non clear and all the variables atomic number 18 endogenous we decided to use a vector autoregressive regulate (form here on referred to as VAR). A VAR is a systems regression model with both or more variables, where each of them is dependent on preliminary lags of itself and previous lags of the other variables of the system (Brooks 2008, pp. 290-292).
Our informationset is made of quarterly observations of the quartette variables, but each of them is expressed in different units, in particular we take hold the observation on unemployment in a rate and not in absolute numbers.
Thus, before to sterilize our VAR we make a logarithmic transformation of GDP, CPI and the stock market index and we take the first differences of the data on unemployment (in order to get their percentage change). Furthermore we procreate the logarithm of GDP, CPI and stock market index data for 100 to harmonize their unit with the one of unemployment.
Our variables are indeed specified as: DE_LNGDP, DE_LNCPI, DE_LNSTOCKR, DE_LNUNEM.
Methodology
Before to estimate our VAR model we also need to make sure that all the variables are stationary so that we don´t risk to have spurious regressions (Brooks 2008, p.304), thus we used the Augmented Dickey fraught(predicate) (ADF) test to evaluate the stationary features of the variables. Once we are sure the variables are all stationary, we estimate the VAR model and use the...If you want to get a full essay, order it on our website: Ordercustompaper.com
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