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Misadjustment to anticipated shocks: a clarification
Author(s) -
Chang Wenya,
Lai Chingchong,
Tsai Hsuehfang
Publication year - 1999
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/(sici)1099-1158(199910)4:4<335::aid-ijfe106>3.0.co;2-c
Subject(s) - economics , shock (circulatory) , exchange rate , econometrics , instability , eigenvalues and eigenvectors , monetary economics , physics , mechanics , quantum mechanics , medicine
Based on the amended Aoki model embodying alternative price adjustment patterns, this paper re‐examines the evolutionary behavior of exchange rate in response to alternative anticipated disturbances. It is shown that, regardless of whether the system is characterized by the global instability or by the saddlepoint stability, the dynamic pattern of exchange rate may have a misadjusting behavior following an anticipated supply shock. It is also found that an anticipated monetary shock does not misadjust regardless of whether the system has one or two positive eigenvalues. In view of these results, we can thus conclude that the crucial factor for exchange rate misadjustment is the kind of anticipated shocks rather than the number of eigenvalues emphasized by Aoki. Copyright © 1999 John Wiley & Sons, Ltd.