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- Title
MODELLING THE SLOW MEAN-REVERSION OF THE CENTRAL AND EASTERN EUROPEAN COUNTRIES' REAL EXCHANGE RATES.
- Authors
DUFRENOT, GILLES; GRIMAUD, ELISABETH; LATIL, EUGÉNIE; MIGNON, VALERIE
- Abstract
In this paper we propose a new modelling approach of the exchange rate misalignments in four transition countries: Hungary, Poland, Slovakia and Slovenia. We provide an empirical framework that takes into account two characteristics of these misalignments: while the fundamentals and policies adjust to restore equilibrium towards the long-term exchange rate, there are factors that hinder a fast mean-reverting dynamics. When the exchange rates adjust slowly to their equilibrium long-run values, the standard regressions that assume zero-mean misalignments present some drawbacks and one needs a model that helps to capture the time-varying aspects of the misalignment dynamics. The model proposed in this paper reproduces well the periods of overvaluation and undervaluation observed in the four countries.
- Subjects
EASTERN Europe; ECONOMIC models; FOREIGN exchange rates; ECONOMIC equilibrium; REGRESSION analysis; DRAWBACKS (Tariffs); STRUCTURAL frames; BUSINESS valuation; LONG-term business financing
- Publication
Manchester School (1463-6786), 2008, Vol 76, Issue 1, p21
- ISSN
1463-6786
- Publication type
Article
- DOI
10.1111/j.1467-9957.2007.01048.x