On instantaneous speed of adjustment in dynamic linear economic models

Stability is one of the most important aspects in the analysis of dynamic economic models. Restricted to dynamic linear models, stability analysis is very cumbersome due to the size of matrices involved. One approach to simplify this analysis is to assume that one (or a group) of the variables of the model moves infinitely fast toward equilibrium. In this contribution along with the original model we shall consider a simplified model in which a group of variables is assumed to have an infinite speed of adjustment to equilibrium provided that the slower variables are unchanged. We shall discuss the relation between stability and stability margins of the original and simplified models. We restrict our analysis to models having matrices with nonnegative off-diagonal elements.