🌍 Week 11 Homework — Feedback

Student: Giovanni Di Miele Assignment: VAR Estimation and Identification

✅ Overall Assessment

Result: ✅ Pass

Good submission with correct VAR structure. The code estimates a 3-variable VAR and implements the Cholesky identification correctly. Note: You differenced the Federal Funds Rate (diff(Tbl.FEDFUNDS)), which effectively models the change in the interest rate rather than the level. While this is valid econometrically for non-stationary series, standard VAR analysis often uses the rate in levels (or treats the shock to the difference as a shock to the change). This doesn’t invalidate the exercise but changes the interpretation slightly.

🔍 Task-by-Task Check

Task Description Status Notes
1.1 Data Loading & Cleanup ✅ Correctly loads data
1.2 Data Transformation ⚠️ Calculates annualized growth/inflation correctly, but uses diff for FFR (usually kept in levels)
1.3 Construct Data Matrices ✅ Correct setup of matrices
1.4 OLS Estimation ✅ Correct OLS estimation
1.5 Extract A1 Matrix ✅ Correct extraction of coefficients
1.6 Residuals & Sigma ✅ Correct covariance calculation
1.7 Identification (Cholesky) ✅ Correct Cholesky decomposition
1.8 Compute IRFs ✅ Correct loop for IRF generation
1.9 Plot IRFs ✅ Generates correct plots
1.10 Save Figures ✅ Saves figures correctly

📈 Technical Implementation

  • VAR Structure: Correctly implements the 3-variable system despite the transformation difference.
  • Identification: Correctly selects the 3rd shock as the monetary policy shock.

💬 Style & Clarity

  • Comments: Good comments explaining the steps.
  • Interpretation: Includes a detailed interpretation of the results and the Price Puzzle.

📊 Visual Output Assessment

  • Plots: Clear subplots for the IRFs.
  • Labels: Correctly labeled.

✅ Suggestions for Improvement

  1. Variable Choice: Typically, for monetary policy VARs, we use the interest rate in levels (or assume it’s stationary enough). Using differences means a “shock” is a permanent increase in the rate’s growth path (or a one-time change in the level), which implies different dynamics.

🎯 Summary

Good work. The technical implementation is correct, and the interpretation shows good economic intuition.

Grade Level: ✅ Pass (9/10 tasks correct - minor issue with FFR transformation)