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

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