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MEASURING THE STABILITY OF THE PRICE SYSTEM *

By Antonio Fiorencio and Ajax Moreira

Abstract

Abstract: This paper employs the VAR methodology to define and estimate a measure of the stability of the main macroeconomic prices (general price level, nominal exchange rate and nominal interest rate) when subjected to random shocks. A VAR model is system of stochastic difference equations, so its dynamic properties can be described by its eigenvalues. Our measure of the stability of the price system is the absolute value of the largest eigenvalue of the VAR system at each instant, since this largest eigenvalue determines whether the system is stable or not. Since the VAR was specified using time varying parameters, we can estimate the time path of the distribution of this largest eigenvalue. We performed this estimation for Brazil, and Argentina, Israel, Mexico and the United Kingdom. We also analysed whether the several stabilisation programs in the first four countries were successful in the sense of eliminating the explosive behaviour of the price system that we found characterised the periods of high inflation.

Year: 2000
OAI identifier: oai:CiteSeerX.psu:10.1.1.373.1812
Provided by: CiteSeerX
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