Economic Models - Convex Optimization

Time Varying Responses 53
The import cost in turn depends on the exchange rate (EXR) and the world
price of imported goods (WPM). We assume the desired price level (P ∗ )is
represented by the following equation:
P ∗ t = a 27 − a 28 (A t ) + a 29 (IMC t ).
The desired price level reflects private sector’s reaction to their expected
domestic absorption of the expected import cost. Suppose the actual price
will move according to the difference between the desired price in period t
and the actual price level in the previous period
Pt = β(P ∗ t − P t−1 );
0