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

Author

Listed:
  • Ahmad Zubaidi Baharumshah
  • Siew-Voon Soon
  • Stilianos Fountas

    (Department of Economics, University of Macedonia)

  • Nurul Sima Md. Shariff
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..

Suggested Citation

  • Ahmad Zubaidi Baharumshah & Siew-Voon Soon & Stilianos Fountas & Nurul Sima Md. Shariff, 2014. "The persistence of real exchange rates in the Central and Eastern European countries," Discussion Paper Series 2014_08, Department of Economics, University of Macedonia, revised Nov 2014.
    • Handle: RePEc:mcd:mcddps:2014_08
    as

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    References listed on IDEAS

    as
    1. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    2. Su Zhou & Mohsen Bahmani-Oskooee & Ali M. Kutan, 2008. "Purchasing Power Parity before and after the Adoption of the Euro," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 144(1), pages 134-150, April.
    3. Mohsen Bahmani-Oskooee & Ali M. Kutan & Su Zhou, 2008. "Do Real Exchange Rates Follow a Nonlinear Mean Reverting Process in Developing Countries," Southern Economic Journal, John Wiley & Sons, vol. 74(4), pages 1049-1062, April.
    4. Andrews, Donald W K & Chen, Hong-Yuan, 1994. "Approximately Median-Unbiased Estimation of Autoregressive Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 187-204, April.
    5. Darja Boršič & Ahmad Zubaidi Baharumshah & Jani Bekő, 2012. "Are we getting closer to purchasing power parity in Central and Eastern European economies?," Applied Economics Letters, Taylor & Francis Journals, vol. 19(1), pages 87-91, January.
    6. Rossi, Barbara, 2005. "Confidence Intervals for Half-Life Deviations From Purchasing Power Parity," Journal of Business & Economic Statistics, American Statistical Association, vol. 23, pages 432-442, October.
    7. Sekioua, Sofiane H., 2008. "Real interest parity (RIP) over the 20th century: New evidence based on confidence intervals for the largest root and the half-life," Journal of International Money and Finance, Elsevier, vol. 27(1), pages 76-101, February.
    8. Sofiane H. Sekioua, 2004. "Real interest parity (RIP) over the 20th century: New evidence based on confidence intervals for the dominant root and half-lives of shocks," Money Macro and Finance (MMF) Research Group Conference 2004 91, Money Macro and Finance Research Group.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    half-lives; local persistence; structural breaks; real exchange rate; PPP puzzle; transition economies.;
    All these keywords.

    JEL classification:

    • C0 - Mathematical and Quantitative Methods - - General
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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