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

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  • JAEBEOM KIM
  • MASAO OGAKI
  • MINSEOK YANG

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.

Suggested Citation

  • Jaebeom Kim & Masao Ogaki & Minseok Yang, 2007. "Structural Error Correction Models: A System Method for Linear Rational Expectations Models and an Application to an Exchange Rate Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(8), pages 2057-2075, December.
    • Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:8:p:2057-2075
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