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Modeling real exchange rate misalignments: Implications on the estimation of half-lives

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  • Kubota, Megumi

Abstract

This paper proposes an alternative approach to estimating the half-life of real exchange rate (RER) misalignments. I assess mean reversion toward a time varying, fundamentals-based equilibrium real exchange rate (RER) rather than examining mean reversion toward the Purchasing Power Parity (PPP) benchmark. The equilibrium RER and associated half-life of RER deviations are estimated using the Wickens–Breusch unrestricted vector error correction model. Using a heterogeneous sample of 113 countries over 1970-2022, the median half-life of RER deviations is 2.74 years, implying that roughly one quarter of any deviation is corrected within a year. Over half of countries in my sample exhibit half-lives below three years, indicating faster adjustment than commonly reported. My findings also reveal that adjustment to equilibrium is faster in countries under floating exchange rates and before the global financial crisis.

Suggested Citation

  • Kubota, Megumi, 2026. "Modeling real exchange rate misalignments: Implications on the estimation of half-lives," Emerging Markets Review, Elsevier, vol. 73(C).
    • Handle: RePEc:eee:ememar:v:73:y:2026:i:c:s156601412600052x
    DOI: 10.1016/j.ememar.2026.101488
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    JEL classification:

    • F3 - International Economics - - International Finance
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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