Time to equilibrium in exchange rates: G-10 and Eastern European economies

Catherine S.F. Ho and Mohamed Ariff ()

Global Finance Journal, 2012, vol. 23, issue 2, 94-107

Abstract: This paper reports different times-to-equilibrium for G-10 developed economies and the Eastern European emerging economies. By applying a novel method of value-weighted index to highly-trade-linked economies, we test the purchasing power parity to the full length of time-to-equilibrium. The times-to-equilibrium obtained are: 6years for developed and 2years for emerging economies. These results are consistent with the sticky price hypothesis: economies trading in highly aggregated capital goods take longer time to reach price equilibrium in the face of overshooting exchange rates: the opposite is true for primary exporters. This finding is new for these two groups, and could be compared usefully with the earlier reports of long half-life for developed countries. Also, our method of measurement establishes the actual time of the theory prediction on price-to-currency relationship. It is possible to apply this methodology to study more groups of countries.

Keywords: Exchange rates; Purchasing power parity; Divisia index; Long run equilibrium; Half-life equilibrium; Trade-linked groups (search for similar items in EconPapers)
JEL-codes: C43 F31 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:glofin:v:23:y:2012:i:2:p:94-107

DOI: 10.1016/j.gfj.2012.03.002

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