Model objects, Policy

simulations and Forecasting in

E-views:
a step by step approach
By

Tinashe Bvirindi
[email protected]
Layout
• Model object creation
• Solving a model (in sample)
• Forecasting out of sample
• Conducting policy simulations and ploting response functions
Modelling in E-views
• A model consists of a set of equations that
jointly describe the relationship between a set of
variables.
• The equations can be:
• Simple Identities,
• Results of single equations, or
• Results of multiple equation estimators
 Modelling in E-views
• The equations are combined in a single object to derive
deterministic or stochastic joint forecasts or simulations
for all the variables in the model.
• Deterministic setting: model inputs are fixed at known values
and a single path is calculated for the output variable
• Stochastic setting: uncertainty is incorporated into the model
by adding a random element to the coefficients, equation
residuals or exogenous variables
• Models allow us to conduct policy simulations
Modelling in Eviews
• In Eviews for the model to have a unique solution, there should
typically be as many equations as there are endogenous variables
• Each equatin in the model must have a unique endogenous variable
assigned to it.
• Any variable that is not assigned as an endogenous variable is
considered exogenous to the model.
Creating a model object

To create a model
object, click on Object,
in the main window and
select New Object
Building a model

Give the model a

name of your choice

Now on the type of

object, select Model
and click OK
Model object
Model object
• Equations in Eviews can either be inline or linked
• Inline - the equation is specified as text within the model
• linked – the equation brings its specification into the model from an external
eviews object e.g. a single equation object
• The advantage of linking is that it allows coupling of the model with
the estimation procedure underlying the equations.
• Equations can either be stochastic equations or identities
Creating a linked equation

To create a linked
equation, right click
on the equation of
choice then copy it
Creating a linked equation

Now take the

copied equation
and then paste it
in this window
Creating a linked equation

Select the yes to all option

Linked equations

List of variables
In this equation window all the pasted
equations will appear, with a list of
their explanatory variables
The scenario in
question appears
here
Linked equations

To views the variable

dependencies and their
classifications click on the
Variables button

Adds stands for add factors

Endogenous variables
Exogenous are equation variables
variables are and have and En
labelled and
have an X
Advantage of linking the equations
• Once we added our equations as linked equations we can go back and
re-estimate our equations and automatically update the model to the
new estimates as follows:

Click on Proc, then select

the Links button and click
update all links and
recompile
Adding identities
• In order to add identities, right click the mouse while in the VIEW
equation window.

Right click anywhere

in this window and
click on insert
Adding identities

Once you select insert this

dialogue box will appear and
then you enter the identity
into the model source edit
window and click OK
Creating inline equations
• To create an inline equation first copy the equation representations

First open the equation of

choice and click on view,
then select
representations
Creating inline equations

Once this output

comes out copy the
substituted
coefficients
Creating an inline equation

Click on the text toggle/

button and paste the copied
equation into this window
Inline equations

In order to view the

dependence structure of the
variables, click on variables

Then click Yes to save modifications and

compile
Inline equations

Click on view to
see the equations
or the block
structure of the
model

Block structure
Inline text equation
Solving equations
• Once you have inputed all the equations into the model the next step
is to solve the model
• There are many options available for solving the model in Eviews
• For now we concentrate on the basic techniques
• To solve the model simpy click on solve
• However, before we solve the data we may want to input the
exogenous variables we wish to use in policy simulations as in line
text
Solving the model

Click on text and type the

variable you wish to
employ in policy
NB: this technique simulations
is a shortcut and
is sometimes not
advisable
Solving the model

Click on solve and then click on Yes

To save and compile modifications
 Solving the model Once you click save this
dialogue box will appear

Click on Choose baseline scenario

deterministic

Select static
solution for
model Adjust the sample
evaluation size over which to
solve the model to
avoid initialising
the model on
missing values
Solving the model
• Once you have set all the conditions click OK to solve the model
• You will then receive the following solution message
Workfile appearance after initial solve

The solution of the baseline

scenario is saved with and
underscore of zero in the workfile
Forecasting- static solution

Plot the baseline

lm3 from the
static solution
against the actual
lm3
Forecast- dynamic solution (recursive)
Re-solve the model
but this time
selecting the
dynamic solution
and plot the baseline
from the dynamic
solution against the
actual

This result shows how the model

Would have performed if we had If satisfied with performance
used it back in 2000 of the model against
historical date we can use
the model to forecast future
values of endogenous
variables
Forecasting out of sample
• First step is to decide on the value of exogenous variables.
• If they are not available the re is need to provide these.
•
Out of sample forecasting Eviews uses a Monte Carlo
simulation technique to generate
the uncertainty surrounding our
forecasts

To generate this graph,

click the solve button
and in the model
solution dialogue select
stochastic, and tick the
standard deviation box
in Active and click OK

Then go to Proc, Make graph,

and in the solution series box
select mean+2s.d and reset
sample period to 2003Q1 to
2011Q4, and click OK
Policy simulations
• Having satisfied ourselves of our model’s capabilities in and outside
the sample we may conduct policy simulations
• In the policy simulations, we are mainly interested in the impact that
the exogenous variable will have on the endogenous variables and
ultimately on our model
• Economists- interest is to assess the effect of policy variable on
macroeconomic aggregates
• Risk manager/ supervisor- interest is to determine the level of stress that an
external event may induce on the endogenous variables
Policy simulations
• Step 1: create a scenario

In the model object

window click on View, then
select Scenarios
Policy simulations

Click on create new and

then OK
Policy simulations

Click on the Variables

button
Policy simulations

Right click on the exogenous

variable of interest and the select
properties on the drop down
menu
Policy simulations

Tick in the use override

series in scenario and
click OK
Policy simulation

Once the variable is set the

text changes to red
Policy simulation- temporary shock
• Lets assume a temporary shock of a sudden increase in nominal
income of 10% per quarter for the period 2001Q1 to 2003Q3
• To do policy simulation we make use of a very simple command

Set the period over

which the shock
takes place
And calibrate the
shock
Policy simulation
• Once the sample size is set and the shock is specified then we
proceed to solve the model

Click on solve in the

model object window
 Policy simulation

Reset
simulation
type to Make sure the
deterministic set scenario is
active and
click ok

Set the
interval
over which
you want
to estimate
Policy simulations

Solution
message for
the scenario
Plotting the results

Whilst still in the

model object click
on the Proc Button
and select the make
graph option
 Policy simulation: shock vs baseline
Select list of Make sure
variables and that the
list actuals and
endogenous scenario
variables are
selected

Reset
horizon
and click
OK
Policy shock simulation
IMPULSE RESPONSE OF LM3 TO LNGDP

Money supply has a

lagged response to
income, relationship
is error correcting,
shocks die down after
about 5 years
 Class exercise
1. Estimate the following error correction models:
• D(LSTCKPR) LSTCKPR(-1) LTDC(-1) LCPI(-1) LP_R(-1) C D(LTDC(-1)) D(LCPI(-4))
D(LP_R(-1)) D(LSTCKPR(-1))
• D(LM3) LM3(-1) LNGDP(-1) LCPI(-1) LP_R(-1) C D(LM3(-1)) D(LCPI(-3)) D(LNGDP(-
4)) D(LP_R(-4))
• D(LTDC) LTDC(-1) LR(-1) LM3(-1) LNGDP(-1) LNEER(-1) C D(LR(-1)) D(LTDC(-1))
D(LM3(-1)) D(LNGDP(-3)) D(LNEER(-2))
2. Create a model object with the three equations and solve it.
3. Perform an in sample forecast and produce an out of sample forecast
showing the level of uncertainty associated with the forecast.
4. Trace the impact of an increase in GDP on money demand, the stock
price and domestic credit and comment
5. Plot the impulse response function
References