In this case, there are two possible shocks to the system, one to
and another to ݔ ,then, there would be four impulse response functions as:
- The effect of a shock to on the time path of and
- The effect of a shock to on the time path of and
The actual mechanics of generating impulse responses in a system
is complicated by;
1. One has to allow for interdependent dynamics (the multivariate analog of
generating the multipliers)
2. One has to identify the correct shock from unobservable data.
From these two complications lead to what is known as the
identification problem. If there is no identification problem, the system would be as
described in equation 2.26 and 2.27. There is a true representation of the dynamic
system, is related only to lags of and ,and is related only to lags of and .In
another words, is related only to lags of and are related in a dynamic but not