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Q2. Suppose you are interested in the short-run dynamic of commodity price changes and changes in the Australian dollar from Feb 2010 to Aug 2021. (a) Why do you believe it is appropriate to use a Vector Autoregression model to study the short-run dynamic? [2] (b) The table below shows the different criteria used to determine the appropriate lag length of the VAR model. What is the optimal lag length? [2] VAR Lag Order Selection Criteria Endogenous variables: DEXRATE DCP Exogenous variables: C Date: 09/26/21 Time: 19:07 Sample: 2010M02 2021M08 Included observations: 130 * indicates lag order selected by the criterion LR: sequential modified LR test statistic (each test at 5% level) FPE: Final prediction error AIC: Akaike information criterion SC: Schwarz information criterion HQ: Hannan-Quinn information criterion Q2. Suppose you are interested in the short-run dynamic of commodity price changes and changes in the Australian dollar from Feb 2010 to Aug 2021. (a) Why do you believe it is appropriate to use a Vector Autoregression model to study the short-run dynamic? [2] (b) The table below shows the different criteria used to determine the appropriate lag length of the VAR model. What is the optimal lag length? [2] VAR Lag Order Selection Criteria Endogenous variables: DEXRATE DCP Exogenous variables: C Date: 09/26/21 Time: 19:07 Sample: 2010M02 2021M08 Included observations: 130 * indicates lag order selected by the criterion LR: sequential modified LR test statistic (each test at 5% level) FPE: Final prediction error AIC: Akaike information criterion SC: Schwarz information criterion HQ: Hannan-Quinn information criterion

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