Real Exchange Rate Adjustment In European Transition Countries

This paper presents unit-root test results for real exchange rates in ten Central and Eastern European transition countries during 1993:01-2003:12. Because of the shift from controlled to market economies and the accompanying crises, failed policy regimes and changes in exchange rate regimes, appropriate tests in transition countries require allowing for both structural changes and outliers. In both single-equation tests and panel tests with SUR techniques, the data reject the unit-root null for the CEE countries. Accounting for structural breaks and outliers gives much faster mean-reversion speeds than otherwise.

Introduction: Purchasing power parity (PPP) is one of the oldest, most studied topics in international nance.Many models of exchange-rate determination are built on the assumption that PPP holds at least in the long run. Much work has been done to test for PPP in developed countries, and more recently a number of papers have tested for PPP in developing countries. Little work, however,has been done on PPP in the transition countries of Central and Eastern Europe (CEE), which are moving from communist planning to free market economies.

Author: Florin G. Maican, Richard J. Sweeney

Source: Göteborg University

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