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Prepared by Alex Pienkowski.
For example, a structural model might differentiate between productivity and nominal shocks both in Madagascar and abroad, which would have theoretically different implications on inflation and exchange rates. The VAR approach can, at best, approximate these relationships, and so should be viewed as identifying ‘reduced form’ relationships.
Following Mwase (2006), the quarterly data is interpolated from annual observations, and an HP-filter is used to construct the output gap estimate.
International oil prices are included as an exogenous variable; including the output gap as an exogenous or endogenous variable does not materially change the pass-though estimates (the latter specification is reported).