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

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Journal Article

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Ho, C.S.F. & Ariff, M. (2012). Time to equilibrium in exchange rates: G-10 and Eastern European economies. Global Finance Journal, 23(2), 94–107

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2012 HERDC submission. FoR code: 140210; 150201

© Copyright Elsevier B.V., 2013




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: 6 years for developed and 2 years 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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