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Keywords:

  • C32;
  • F31;
  • F41
  • structural error correction model (SECM);
  • half-life;
  • purchasing power parity (PPP);
  • convergence rate;
  • real exchange rate

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.