Can we combine VARMAX procedure with Difference in Differences method? Here is the context of my study:
I have 3 time series, Y1t, Y2t and Xt, in which Y1t and Y2t change over time with changes in Xt. However, I also have a binary variable, Z, which is an indicator of a policy shift in the middle of the time series that only affects Y1t. So, after a specific point in time, the values of Y1t will also be affected by the policy implementation Z while there is no policy effects on Y2t, time series Xt will continue to impact both Y1t and Y2t after the policy implementation.
One thing that I can think of is to change Z into a time series with values equal to 0 before the policy shift date and 1 after the policy shift date. Does that work?
Yes, your idea of including your indicator variable, Z, in the equation for Y1 along with your other input variable, X, in your Y1 and Y2 equations is a reasonable approach. For example, you can specify the following MODEL statement in PROC VARMAX, where <options> is your list of desired options:
model y1=x z , y2=x / <options> ;
For more details on the MODEL statement syntax when a different set of input variables is used in each equation, please see the following link:
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