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


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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Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 39 (2007)
Issue (Month): 8 (December)
Pages: 2057-2075

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Handle: RePEc:mcb:jmoncb:v:39:y:2007:i:8:p:2057-2075
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