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

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  • Ho, Catherine S.F.
  • Ariff, M.

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.

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Bibliographic Info

Article provided by Elsevier in its journal Global Finance Journal.

Volume (Year): 23 (2012)
Issue (Month): 2 ()
Pages: 94-107

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Handle: RePEc:eee:glofin:v:23:y:2012:i:2:p:94-107

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Web page: http://www.elsevier.com/locate/inca/620162

Related research

Keywords: Exchange rates; Purchasing power parity; Divisia index; Long run equilibrium; Half-life equilibrium; Trade-linked groups;

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References

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