Persistence of Real Exchange Rates in the Central and Eastern European Countries

Abstract

We investigate the mean reversion in real exchange rates for Central and Eastern European countries. We use point and confidence interval estimates from the Phillips et al.’s (2001) local-persistent model as our preferred measures of the persistence of real exchange rates. We find that the adjustment to purchasing power parity is more rapid after accounting for structural breaks, with half-life deviation from parity below 18 months, which is consistent with the explanation based on nominal rigidities. The estimated narrow confidence intervals for the half-lives invalidate the purchasing power parity puzzle for transition and some core European Union countries. The novelty of our results lies in the finding of strong evidence for purchasing power parity as the local-persistent model produces shorter half-lives and much narrower corresponding confidence intervals than those obtained by standard Dickey-Fuller and local-to-unity models. Our evidence for PPP suggests that the transition countries have maintained their long-run competitiveness against their trading partners.

Keywords:

• half-lives
• local persistence
• structural breaks
• real exchange rate
• PPP puzzle
• transition economies

JEL Classification:

• C22
• E30
• F31

Additional information

Notes on contributors

Ahmad Zubaidi Baharumshah

Ahmad Zubaidi BAHARUMSHAH is a Professor at the Faculty of Economics and Management, Universiti Putra Malaysia. His area of interest is in International Finance and Macroeconomics and to date has published more than 80 research articles.

Siew-Voon Soon

Siew-Voon SOON currently is a postdoctoral researcher at the Faculty of Economics and Management, Universiti Putra Malaysia. Her research interests are mainly in Macroeconomics, International Finance and Applied Econometrics.

Stilianos Fountas

Stilianos FOUNTAS is a Professor of Economics at the University of Macedonia in Greece. He has worked previously at the National University of Ireland, Galway. He has held visiting appointments at the University of York in the UK and the University of California at San Diego. He has published extensively in the areas of Applied Macroeconomics and International Finance. He has more than 45 publications in international refereed journals including the Journal of International Money and Finance, Oxford Bulletin of Economics and Statistics and Economics Letters.

Nurul Sima Mohamad Shariff

Nurul Sima MAHAMAD SHARIF is a lecturer at Faculty of Science and Technology, Universiti Sains Islam Malaysia, Nilai, Negeri Sembilan, Malaysia. Her main areas of research interest are robust statistics, panel data analysis and statistical computing.