You are interested in the dynamic relationship between the GDP (industrial_production) and Inflation (inflation). In order to statistically evaluate their mutual behaviour you decide to estimate a VAR model.

a)What is the optimal lag length (given that we focus on the Schwarz information criterion)? Justify your decisione)

b)Independent of your findings under a), you decide to build a VAR with three lags. What is R^2for the inflation rate? Discuss what its value implies.

c)Discuss the causality structure?Is there any issue with Granger Causality?

d)What can you say about the Impulse Responses? Is there a connection to your answer in part c)?

e) Is there a unit root in GDP and inflation, respectively? Given your answer, is there a problem in estimating this VAR model?