MODELLING THE SLOW MEAN‐REVERSION OF THE CENTRAL AND EASTERN EUROPEAN COUNTRIES' REAL EXCHANGE RATES*

Gilles Dufrénot (), Elisabeth Grimaud, Eugénie Latil and Valérie Mignon ()

Manchester School, 2008, vol. 76, issue 1, 21-43

Abstract: In this paper we propose a new modelling approach of the exchange rate misalignments in four transition countries: Hungary, Poland, Slovakia and Slovenia. We provide an empirical framework that takes into account two characteristics of these misalignments: while the fundamentals and policies adjust to restore equilibrium towards the long‐term exchange rate, there are factors that hinder a fast mean‐reverting dynamics. When the exchange rates adjust slowly to their equilibrium long‐run values, the standard regressions that assume zero‐mean misalignments present some drawbacks and one needs a model that helps to capture the time‐varying aspects of the misalignment dynamics. The model proposed in this paper reproduces well the periods of overvaluation and undervaluation observed in the four countries.

Date: 2008
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https://doi.org/10.1111/j.1467-9957.2007.01048.x

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Working Paper: Modelling the slow mean-reversion of the Central and Eastern European countries ' real exchange rates (2008)
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