Structural error correction models: A system method for linear rational expectations models and an application to an exchange rate model

Jaebeom Kim, Masao Ogaki, Minseok Yang

Research output: Contribution to journalArticle

3 Citations (Scopus)

Abstract

This paper develops a system instrumental variable method to estimate the speed of adjustment coefficient in the long-run equilibrium of structural error correction models for a class of linear rational expectations models. This method is applied to an exchange rate model with sticky prices, in which the speed of adjustment coefficient governs the half-life of the real exchange rate. Compared to single equation methods, the system method gives smaller half-life estimates with sharper standard errors.

Original languageEnglish
Pages (from-to)2057-2075
Number of pages19
JournalJournal of Money, Credit and Banking
Volume39
Issue number8
DOIs
Publication statusPublished - 2007 Dec 1
Externally publishedYes

Keywords

  • Convergence rate
  • Half-life
  • Purchasing power parity (PPP)
  • Real exchange rate
  • Structural error correction model (SECM)

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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