Misadjustment to Anticipated Shocks: A Clarification

Wen-ya Chang, Ching-chong Lai and Hsueh-fang Tsai

International Journal of Finance & Economics, 1999, vol. 4, issue 4, 335-51

Abstract: Based on the amended Aoki model embodying alternative price adjustment patterns, this paper re-examines the evolutionary behavior of exchange rate in response to alternative anticipated disturbances. It is shown that, regardless of whether the system is characterized by the global instability or by the saddlepoint stability, the dynamic pattern of exchange rate may have a misadjusting behavior following an anticipated supply shock. It is also found that an anticipated monetary shock does not misadjust regardless of whether the system has one or two positive eigenvalues. In view of these results, we can thus conclude that the crucial factor for exchange rate misadjustment is the kind of anticipated shocks rather than the number of eigenvalues emphasized by Aoki. Copyright @ 1999 by John Wiley & Sons, Ltd. All rights reserved.

Date: 1999
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