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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.

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  • 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:wly:jmoncb:v:39:y:2007:i:8:p:2057-2075
    DOI: 10.1111/j.1538-4616.2007.00098.x
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