CHAPTER 4: RESULTS AND INTERPRETATIONS
4.3 Impulse Response
The Impulse response function of VAR is to analysis dynamic effects of the sample when the model received the impulse.
From the figure 4.3, 4.3.1, and 4.3.2, is the impulse response of institutional quality, oil price and monetary policy to the real GDP. For the full sample, when the impulse is institutional quality, more than half response in the ten periods of real GDP is positive effect. However, after period eight, the response became negative effect. While, the real GDP response negatively towards oil price for the first eight periods and then the response went positive. Meanwhile, the response of real GDP on monetary policy is almost similar with response of institutional quality. It responded positively for the first eight periods and then the response became negative after period eight.
Meanwhile, the graph in figure 4.3 appeared to be only two lines is due the overlapping from model 1 on baseline model. On the other hand, the graphs appeared to be one line in figure 4.3.1 and figure 4.3.2 due to the overlapping effect on the three models, which is baseline model, model 1 and model 2.
Figure 4.3: Impulse Response of Real GDP towards Structural Shock to Institutional Quality, 1980Q1-2007Q4.
Figure 4.3.1: Impulse Response of Real GDP towards Structural Shock to Oil Price, 1980Q1-2007Q4.
-0.02 -0.015 -0.01 -0.005 0 0.005 0.01 0.015
1 2 3 4 5 6 7 8 9 10
Impulse Response of R eal GDP
Period
baseline model model 1 model 2
-0.015 -0.01 -0.005 0 0.005 0.01 0.015
1 2 3 4 5 6 7 8 9 10
Impulse Response of Real GDP
Period
baseline model model 1 model 2
Figure 4.3.2: Impulse Response of Real GDP towards Structural Shock to Monetary Policy, 1980Q1 -2007Q4
As we can see, from the figure 4.3.3 to 4.3.8, is the impulse response of institutional quality, oil price and monetary policy to the real GDP for two different sub-samples, which sub-sample 1 is from year 1980Q1 to 1996 Q4 and sub-sample 2 is from 1997Q1 to 2007Q4. When the impulse is institutional quality, the response in the ten periods of real GDP in sub-sample 1 is positive effect for the first five period and then it goes negative and stays there while response in ten periods of real GDP in sub-sample 2 is all positive effect except for negative effect in fourth period and the highest positive effect is at period eight.
When the impulse is oil price, the response of real GDP in sub-sample 1 is all negative effect and the shape is persistent while in sub-sample 2, there is more fluctuation. In sub-sample 2, the response has positive effect in first period and goes to negative in second period and then it fluctuate around negative effect until period ten.
-0.008 -0.006 -0.004 -0.002 0 0.002 0.004 0.006 0.008
1 2 3 4 5 6 7 8 9 10
Impulse response of Real GDP
Period
baseline model model 1 model 2
When the impulse is monetary policy, the response of real GDP is sub sample 1 is all positive effect except for negative effect at the sixth period. However, in sub-sample 2, all the response of real GDP is positive effect and the response is almost disappear at period ten.
The graphs appeared to be one line in figure 4.3.3, figure 4.3.4 and figure 4.3.5 due to the overlapping effect on the three models, which is baseline model, model 1 and model 2. Meanwhile, in figure 4.3.7, the graph appeared to be only two lines because the results in model 1 is overlapping baseline model. In figure 4.3.8, the graph appeared to be two lines is due to the overlapping from model 2 on baseline model.
Figure 4.3.3 Impulse Response of Real GDP towards Structural Shock to Institutional Quality, 1980Q1-1996Q4
-0.008 -0.006 -0.004 -0.002 0 0.002 0.004 0.006
1 2 3 4 5 6 7 8 9 10
Impulse Response of Real GDP
Period
baseline model model 1 model 2
Figure 4.3.4: Impulse Response of Real GDP towards Structural Shock to Oil Price, 1980Q1-1996Q4.
Figure 4.3.5: Impulse Response of Real GDP towards Structural Shock to Monetary Policy, 1980Q1-1996Q4.
Impulse Response of Real GDP
Period
baseline model model 1 model 2
Figure 4.3.6: Impulse Response of Real GDP towards Structural Shock to Institutional Quality, 1997Q1-2007Q4.
Figure 4.3.7: Impulse Response of Real GDP towards Structural Shock to Oil Price Shocks, 1997Q1-2007Q4
Figure 4.3.8: Impulse Response of Real GDP towards Structural Shock to Monetary Policy, 1997Q1-2007Q4.
From the figure 4.3.9, 4.3.10, and 4.3.11, is the impulse response of institutional quality, oil price and monetary policy to inflation. For the full sample, when the impulse is institutional quality, the response of inflation has obvious fluctuation. It has the lowest negative effect at the sixth period and the highest positive effect at period ten.
When the impulse is oil price, the response of inflation is all positive effect and has the highest positive effect at the fifth period. The response decreases to almost zero at period ten.
Meanwhile, when the impulse is monetary policy, the response of inflation is all negative effect and reached the lowest point at the sixth period. For figure 4.3.9, 4.3.10, and 4.3.11, the graph appeared to be two lines is due to the overlapping from model 2 on baseline model.
0 0.002 0.004 0.006 0.008 0.01 0.012 0.014 0.016 0.018 0.02
1 2 3 4 5 6 7 8 9 10
Impulse Response of Real GDP
Period
baseline model model 1 model 2
Figure 4.3.9: Impulse Response of Inflation towards Structural Shock to Institutional Quality, 1980Q1-2007Q4.
Figure 4.3.10: Impulse Response of Inflation towards Structural Shock to Oil Price, 1980Q1- 2007Q4.
Figure 4.3.11: Impulse Response of Inflation towards Structural Shock to Monetary Policy, 1980Q1-2007Q4.
As we can see, from the figure 4.3.12 to 4.3.17, is the impulse response of institutional quality, oil price and monetary policy to the inflation for two different samples, which sample 1 is from year 1980Q1 to 1996 Q4 and sub-sample 2 is from 1997Q1 to 2007Q4. When the impulse is institutional quality, the response of inflation in sub-sample 1 is negative effect for the first five period and then goes to positive after the fifth period. However, the response of inflation in sub-sample 2 is all positive effect and persistent in the ten periods.
Other than that, when the impulse is oil price, the response of inflation in sub-sample 1 is all negative effect and persistent. Although in sub-sub-sample 2, the response is persistent, but first three periods is positive effect before it falls to negative effect.
When the impulse is monetary policy, the response of inflation in sub-sample 1 has an obvious fluctuation, there is a highest positive effect would be at period ten and lowest negative effect on the fourth period. Meanwhile, the response of
inflation in sub-sample 2 has less fluctuation; there is a lowest negative effect at the third period and a highest positive effect at period seven.
In figure 4.3.12, figure 4.3.14 and figure 4.3.16, the graph appeared to be only one line is due to model 2 overlapping baseline and model 1. Meanwhile, in figure 4.3.13, figure 4.3.15 and figure 4.3.17, the graph appeared to be two lines is due to the overlapping from model 2 on baseline model.
Figure 4.3.12: Impulse Response of Inflation towards Structural Shock to Institutional Quality, 1980Q1-1996Q4.
-0.0015 -0.001 -0.0005 0 0.0005 0.001 0.0015
1 2 3 4 5 6 7 8 9 10
Impulse Response of inflation
Period
baseline model model 1 model 2
Figure 4.3.13: Impulse Response of Inflation towards Structural Shock to Oil Price, 1980Q1-1996Q4.
Figure 4.3.14: Impulse Response of Inflation towards Structural Shock to Monetary Policy, 1980Q1-1996Q4.
Figure 4.3.15: Impulse Response of Inflation towards Structural Shock to Institutional Quality, 1997Q1-2007Q4.
Figure 4.3.16: Impulse Response of Inflation towards Structural Shock to Oil Price, 1997Q1-2007Q4.
0 0.002 0.004 0.006 0.008 0.01 0.012
1 2 3 4 5 6 7 8 9 10
Impulse Response of inflation
Period
baseline model 1 model 2
-0.008 -0.006 -0.004 -0.002 0 0.002 0.004 0.006
1 2 3 4 5 6 7 8 9 10
Impulse Response of Inflation
Period
baseline model model 1 model 2
Figure 4.3.17: Impulse Response of Inflation towards Structural Shock to Monetary Policy, 1997Q1-2007Q4.