Title:
SMOOTH TRANSITION STRUCTURAL VECTOR AUTOREGRESSIONS: APPLICATION TO THE RELATION BETWEEN INFLATION AND OUTPUT GROWTH IN RWANDA

Authors:
Mr. Placide Aime Kwizera,Rwanda

Abstract:
The aim of this paper is to introduce the structural vector with smooth transition and its application to study a relation between inflation and output growth using a five dimensional scheme of Rwandan variables spanning from January, 1981 to June, 2018. Although VAR has become a standard tool for empirical macroeconomic analysis, it cannot address some of fundamental research questions thus, an extension of the baseline model to a nonlinear framework. The ST-SVAR allowing for heteroskedasticity is more flexible and relatively easy to estimate to the alternative approaches for modeling changes in volatility like GARCH or Markov switching residuals. The finding shows transition trajectory from downswing to upswing states started from1995 to 2003, consistent with the economic narratives on the Rwandan economy where Rwanda has been experienced rapid and consistent growth after 1994s. The analysis of the impulse response of conventional SVAR model identifies a sunspot shocks while the ST-SVAR model shows a news shocks. Consequently, the empirical finding suggests that the relation between inflation and the output growth seen in a fairly light on ST-SVAR than in a conventional SVAR analysis in the short run