Applying the amendatory method of the state space model to the exchange rate market — NT dollars against US dollars

Abstract

The main purpose of this research is to present a simple amendment method and to estimate each parameter effectively in state space model. In this paper, the estimator of parameters in state space model obtained by normal equations of ordinary least square. To enhance precision degree of this model, we use the normal equations to calculate the transfer matrix instead of decomposing the Hankel matrix directly. As estimating, we also applied instrument variable to formulate the unknown state variable and the dimension of the state variable is according to Aoki (1994). Additionally, in this empirical study we applied the state space model to the foreign exchange rate market. Thus, using the parameters of state space model, we can compute the interest rate, import and export quantities that affected the exchange rate of NT dollars against US dollars.