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Inventi Impact: Microfinance & Banking

Articles

  • Inventi:mmb/47096/23
    The Impulse Response of Domestic and Foreign Interest Rate in Output, Price, Exchange Rate Model, a Deconstructed Derivation and Economic Calibration of Vector Error Correction Model
    31-Mar-2023 Research 2023 : April-June
    Lingkai Kong, Yunxin Chang

    How to assess external shocks, whether they are inflationary shocks or interest rate shocks without warning, is crucial to construct smooth and predictable financial market. The purpose of this paper is to analyze the short-run and long-run effects of shocks on an economy under chaotic conditions of uncertainty using the Vector Error Correction Model (VECM). A comprehensive and detailed derivation process is presented for VECM and reveals the dynamics of interest rates and inflation in the face of external shocks, through Cholesky ordering and impulse response decomposition. With a constraint, the VECM model is also used to derive its two applications in well-known theoretical fields, the Fisher model and the uncovered interest rate parity (UIP) theory.

    How to Cite this Article
    Attribution/ CC Compliant Citation: Kong, Lingkai, and Yunxin Chang. "The Impulse Response of Domestic and Foreign Interest Rate in Output, Price, Exchange Rate Model, a Deconstructed Derivation and Economic Calibration of Vector Error Correction Model." Journal of Mathematical Finance 12.4 (2022): 646-660. https://doi.org/10.4236/jmf.2022.124034 http://creativecommons.org/licenses/by/4.0/ Some formatting elements, header, footer, logos, dates and pagination were modified while adapting this article.
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