Covered Interest Parity. (I)
Flexible spot rate. (II)
Flexible forward rate. (III)
Changes in the monetary base. (IV)
Interest rate differential. (V)
Expected inflation. (VI)
Actual inflation. (VII)
Price level differential in logs.
Real interest rate differential.
Nominal interest rate differential.
ut Actual minus natural rate of unemployment.
Shocks and restrictions:
, , , . C, D, Λ, α and h are all ≥0 while V, U and R are all ≥0 but less than 1.0. Random variables wt, xt, yt, νt and εt have zero means, zero initial values, are uncorrelated and orthogonal. , and .