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The persistence of real exchange rates in the Central and Eastern European countries

Ahmad Zubaidi Baharumshah (), Siew-Voon Soon (), Stilianos Fountas () and Nurul Sima Md. Shariff ()

Discussion Paper Series from Department of Economics, University of Macedonia

Abstract: This paper investigates the mean reversion in real exchange rates for Central and Eastern European countries. In contrast to previous studies, we use the local-persistent model to measure the half-life. We find that the adjustment to purchasing power parity is more rapid after accounting for structural breaks, taking less than 18 months to be cut in half. The empirical evidence shows that there is no clear-cut difference in the speed of adjustment to shocks between the transition economies and the larger member countries of the European Union. The narrow confidence intervals for the half-lives that accord with the standard sticky-price models provide strong support for purchasing power parity. The purchasing power parity puzzle does not seem to hold in these transition countries. The practical implication of our findings is that the transition countries have successfully adopted trade policies that mimic those of the European Union, with a view to alignment in readiness for European Union membership..

Keywords: half-lives; local persistence; structural breaks; real exchange rate; PPP puzzle; transition economies. (search for similar items in EconPapers)
JEL-codes: C0 F21 F36 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-eec, nep-opm and nep-tra
Date: 2014-11, Revised 2014-11
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Journal Article: Persistence of Real Exchange Rates in the Central and Eastern European Countries (2016) Downloads
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