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Wednesday, November 2, 2011

Impulse Response Functions From VECMs

In the comments and discussion associated with an earlier post on "Testing for Granger Causality" an interesting question arose. If we're using a VAR model for constructing Impulse Response Functions, then typically we'll want to compute and display confidence bands to go with the IRFs, because the latter are  simply "point predictions". The theory for this is really easy, and in the case of EViews it's just a trivial selection to get asymptotically valid confidence bands.

But what about IRFs from a VECM - how do we get confidence bands in this case? This is not nearly so simple, because of the presence of the error-correction term(s) in the model. EViews doesn't supply confidence bands with the IRFs in the case of VECMs. What alternatives do we have?