Impulse Response Function

An Impulse Response Function (IRF) is a tool used to understand how a system reacts to a sudden change or shock. Imagine you drop a pebble into a calm pond: the way the water ripples outward is similar to how an IRF shows the effects of a shock on a system over time. In economics, for example, it helps analysts see how variables like GDP or inflation respond to shocks, such as a sudden change in interest rates. Essentially, it captures the dynamic effects of one event on other variables, illustrating the system's behavior over time.