Structural Error Correction Models: A System Method for Linear Rational Expectations Models and an Application to an Exchange Rate Model

Jaebeom Kim, Masao Ogaki and Minseok Yang

Journal of Money, Credit and Banking, 2007, vol. 39, issue 8, pages 2057-2075

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. Copyright 2007 The Ohio State University.

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Journal of Money, Credit and Banking is edited by Pok-Sang Lam, Deborah Lucas, Masao Ogaki and Kenneth D. West

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