Estimating the Half-Life of Theoretically Founded Real Exchange Rate Misalignments
This paper models empirically the short and long-term behavior of the real exchange rate misalignment -- a key variable in academic and policy circles. The equilibrium real exchange rate is derived from a theoretical model with intertemporal extern...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
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World Bank, Washington, D.C.
2013
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| Online Access: | http://documents.worldbank.org/curated/en/2013/04/17582694/estimating-half-life-theoretically-founded-real-exchange-rate-misalignments http://hdl.handle.net/10986/14450 |
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okr-10986-14450 |
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oai_dc |
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Digital Repository |
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Foreign Institution |
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Digital Repositories |
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World Bank Open Knowledge Repository |
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World Bank |
| language |
English en_US |
| topic |
ACCOUNTING ADVERSE IMPACT AUTOREGRESSION BALANCE OF PAYMENT CAPITAL FLOWS COMMON CURRENCY CURRENCY CURRENCY CRISIS CURRENT ACCOUNT CURRENT ACCOUNT DYNAMICS CURRENT ACCOUNT POSITION DEPENDENT VARIABLE DEPRECIATION DEVALUATION DEVELOPING COUNTRIES DEVELOPMENT POLICY DISEQUILIBRIUM DOMESTIC CURRENCY DYNAMIC ADJUSTMENT ECONOMETRIC ANALYSIS ECONOMETRICS ECONOMIC GROWTH ECONOMIC PERFORMANCE ECONOMIC POLICIES ECONOMIC REVIEW EMPIRICAL EVIDENCE EQUILIBRIUM EQUILIBRIUM LEVEL EQUILIBRIUMS ERROR CORRECTION MODEL ERROR CORRECTION MODELS EXCHANGE RATE ARRANGEMENT EXCHANGE RATE ARRANGEMENTS EXCHANGE RATE DETERMINATION EXCHANGE RATE FLEXIBILITY EXCHANGE RATE POLICIES EXCHANGE RATE POLICY EXCHANGE RATE REGIME EXCHANGE RATE SHOCK EXCHANGE RATE STABILITY EXCHANGE RATE THEORY EXCHANGE RATES EXCHANGE-RATE EXOGENOUS VARIABLES EXPORTS EXTERNAL EQUILIBRIUM EXTERNAL SHOCKS FEDERAL RESERVE FEDERAL RESERVE BANK FINANCIAL OPENNESS FISCAL POLICIES FLEXIBLE EXCHANGE RATE FOREIGN ASSET FOREIGN ASSETS FOREIGN INTEREST FOREIGN INTEREST RATES GDP GDP PER CAPITA GENERAL EQUILIBRIUM GENERAL EQUILIBRIUM MODEL GOVERNMENT SPENDING GROSS DOMESTIC PRODUCT HARD PEG IMBALANCES IMPORT INDUSTRIAL COUNTRIES INDUSTRIAL ECONOMIES INFLATION INSTRUMENTAL VARIABLE INTERNATIONAL BANK INTERNATIONAL ECONOMICS INTERNATIONAL MARKETS INTERNATIONAL MONEY INTERNATIONAL RESERVES INTERNATIONAL TRADE LONG RUN EQUILIBRIUM LONG-RUN EQUILIBRIUM LOSS OF COMPETITIVENESS MACROECONOMIC POLICY MACROECONOMICS MONETARY ARRANGEMENTS MONETARY ECONOMICS OPEN ECONOMIES OVERVALUATION PANEL DATA ESTIMATION PEG PERMANENT SHOCK POLICY EVALUATION POLICY RESEARCH POLITICAL ECONOMY POSITIVE COEFFICIENT POVERTY REDUCTION PRODUCTIVITY PURCHASING POWER PURCHASING POWER PARITY REAL APPRECIATION REAL DEPRECIATION REAL EFFECTIVE EXCHANGE RATE REAL EXCHANGE REAL EXCHANGE RATE REAL EXCHANGE RATE MISALIGNMENT REAL EXCHANGE RATE MISALIGNMENTS REAL EXCHANGE RATES REAL GDP REAL SHOCKS REAL TERMS RELATIVE PRICE RELATIVE PRICES SPEED OF ADJUSTMENT STATISTICAL ANALYSIS SUSTAINABLE CAPITAL TRADABLE GOODS TRANSACTION TRANSACTION COSTS UNDERVALUATION WAGES WORLD DEVELOPMENT INDICATORS |
| spellingShingle |
ACCOUNTING ADVERSE IMPACT AUTOREGRESSION BALANCE OF PAYMENT CAPITAL FLOWS COMMON CURRENCY CURRENCY CURRENCY CRISIS CURRENT ACCOUNT CURRENT ACCOUNT DYNAMICS CURRENT ACCOUNT POSITION DEPENDENT VARIABLE DEPRECIATION DEVALUATION DEVELOPING COUNTRIES DEVELOPMENT POLICY DISEQUILIBRIUM DOMESTIC CURRENCY DYNAMIC ADJUSTMENT ECONOMETRIC ANALYSIS ECONOMETRICS ECONOMIC GROWTH ECONOMIC PERFORMANCE ECONOMIC POLICIES ECONOMIC REVIEW EMPIRICAL EVIDENCE EQUILIBRIUM EQUILIBRIUM LEVEL EQUILIBRIUMS ERROR CORRECTION MODEL ERROR CORRECTION MODELS EXCHANGE RATE ARRANGEMENT EXCHANGE RATE ARRANGEMENTS EXCHANGE RATE DETERMINATION EXCHANGE RATE FLEXIBILITY EXCHANGE RATE POLICIES EXCHANGE RATE POLICY EXCHANGE RATE REGIME EXCHANGE RATE SHOCK EXCHANGE RATE STABILITY EXCHANGE RATE THEORY EXCHANGE RATES EXCHANGE-RATE EXOGENOUS VARIABLES EXPORTS EXTERNAL EQUILIBRIUM EXTERNAL SHOCKS FEDERAL RESERVE FEDERAL RESERVE BANK FINANCIAL OPENNESS FISCAL POLICIES FLEXIBLE EXCHANGE RATE FOREIGN ASSET FOREIGN ASSETS FOREIGN INTEREST FOREIGN INTEREST RATES GDP GDP PER CAPITA GENERAL EQUILIBRIUM GENERAL EQUILIBRIUM MODEL GOVERNMENT SPENDING GROSS DOMESTIC PRODUCT HARD PEG IMBALANCES IMPORT INDUSTRIAL COUNTRIES INDUSTRIAL ECONOMIES INFLATION INSTRUMENTAL VARIABLE INTERNATIONAL BANK INTERNATIONAL ECONOMICS INTERNATIONAL MARKETS INTERNATIONAL MONEY INTERNATIONAL RESERVES INTERNATIONAL TRADE LONG RUN EQUILIBRIUM LONG-RUN EQUILIBRIUM LOSS OF COMPETITIVENESS MACROECONOMIC POLICY MACROECONOMICS MONETARY ARRANGEMENTS MONETARY ECONOMICS OPEN ECONOMIES OVERVALUATION PANEL DATA ESTIMATION PEG PERMANENT SHOCK POLICY EVALUATION POLICY RESEARCH POLITICAL ECONOMY POSITIVE COEFFICIENT POVERTY REDUCTION PRODUCTIVITY PURCHASING POWER PURCHASING POWER PARITY REAL APPRECIATION REAL DEPRECIATION REAL EFFECTIVE EXCHANGE RATE REAL EXCHANGE REAL EXCHANGE RATE REAL EXCHANGE RATE MISALIGNMENT REAL EXCHANGE RATE MISALIGNMENTS REAL EXCHANGE RATES REAL GDP REAL SHOCKS REAL TERMS RELATIVE PRICE RELATIVE PRICES SPEED OF ADJUSTMENT STATISTICAL ANALYSIS SUSTAINABLE CAPITAL TRADABLE GOODS TRANSACTION TRANSACTION COSTS UNDERVALUATION WAGES WORLD DEVELOPMENT INDICATORS Kubota, Megumi Estimating the Half-Life of Theoretically Founded Real Exchange Rate Misalignments |
| relation |
Policy Research Working Paper;No.6411 |
| description |
This paper models empirically the short
and long-term behavior of the real exchange rate
misalignment -- a key variable in academic and policy
circles. The equilibrium real exchange rate is derived from
a theoretical model with intertemporal external equilibrium
and internal equilibrium (in traded and non-traded markets)
based on the current account dynamics and
Harrod-Balassa-Samuelson productivity, respectively. This
provides a bridge between theory and empirics that links the
real exchange rate and its fundamentals (terms of trade, the
ratio of net foreign assets to gross domestic product, and
productivity differentials). The paper contributes to the
literature by: (a) estimating an unrestricted vector error
correction model that examines the short-term dynamics of
real exchange rate misalignments and links these deviations
with shocks to fundamentals from 1970 to 2010, and (b)
computing the speed of reversion of real exchange rate
misalignments with respect to a fundamentals-based
equilibrium level. The paper reconciles two strands of the
empirical literature that estimate the half-life of
purchasing power parity deviations: one, the linear
adjustment model that renders the consensus half-life
estimates of purchasing power parity deviations, and
another, the non-linear adjustment model of purchasing power
parity deviations. The model estimates the half-life of real
exchange rate deviations from their fundamental equilibrium
at approximately 2.8 years. Consequently, about 25 percent
of the real exchange rate deviation from its equilibrium
level is corrected in the next year. Approximately 43
percent of the countries in the sample have a half-life of
real exchange rate deviations from equilibrium less than 2.5
years -- which is consistent with predictions from
non-linear mean reversion models. |
| format |
Publications & Research :: Policy Research Working Paper |
| author |
Kubota, Megumi |
| author_facet |
Kubota, Megumi |
| author_sort |
Kubota, Megumi |
| title |
Estimating the Half-Life of Theoretically Founded Real Exchange Rate Misalignments |
| title_short |
Estimating the Half-Life of Theoretically Founded Real Exchange Rate Misalignments |
| title_full |
Estimating the Half-Life of Theoretically Founded Real Exchange Rate Misalignments |
| title_fullStr |
Estimating the Half-Life of Theoretically Founded Real Exchange Rate Misalignments |
| title_full_unstemmed |
Estimating the Half-Life of Theoretically Founded Real Exchange Rate Misalignments |
| title_sort |
estimating the half-life of theoretically founded real exchange rate misalignments |
| publisher |
World Bank, Washington, D.C. |
| publishDate |
2013 |
| url |
http://documents.worldbank.org/curated/en/2013/04/17582694/estimating-half-life-theoretically-founded-real-exchange-rate-misalignments http://hdl.handle.net/10986/14450 |
| _version_ |
1764429340101050368 |
| spelling |
okr-10986-144502021-04-23T14:03:19Z Estimating the Half-Life of Theoretically Founded Real Exchange Rate Misalignments Kubota, Megumi ACCOUNTING ADVERSE IMPACT AUTOREGRESSION BALANCE OF PAYMENT CAPITAL FLOWS COMMON CURRENCY CURRENCY CURRENCY CRISIS CURRENT ACCOUNT CURRENT ACCOUNT DYNAMICS CURRENT ACCOUNT POSITION DEPENDENT VARIABLE DEPRECIATION DEVALUATION DEVELOPING COUNTRIES DEVELOPMENT POLICY DISEQUILIBRIUM DOMESTIC CURRENCY DYNAMIC ADJUSTMENT ECONOMETRIC ANALYSIS ECONOMETRICS ECONOMIC GROWTH ECONOMIC PERFORMANCE ECONOMIC POLICIES ECONOMIC REVIEW EMPIRICAL EVIDENCE EQUILIBRIUM EQUILIBRIUM LEVEL EQUILIBRIUMS ERROR CORRECTION MODEL ERROR CORRECTION MODELS EXCHANGE RATE ARRANGEMENT EXCHANGE RATE ARRANGEMENTS EXCHANGE RATE DETERMINATION EXCHANGE RATE FLEXIBILITY EXCHANGE RATE POLICIES EXCHANGE RATE POLICY EXCHANGE RATE REGIME EXCHANGE RATE SHOCK EXCHANGE RATE STABILITY EXCHANGE RATE THEORY EXCHANGE RATES EXCHANGE-RATE EXOGENOUS VARIABLES EXPORTS EXTERNAL EQUILIBRIUM EXTERNAL SHOCKS FEDERAL RESERVE FEDERAL RESERVE BANK FINANCIAL OPENNESS FISCAL POLICIES FLEXIBLE EXCHANGE RATE FOREIGN ASSET FOREIGN ASSETS FOREIGN INTEREST FOREIGN INTEREST RATES GDP GDP PER CAPITA GENERAL EQUILIBRIUM GENERAL EQUILIBRIUM MODEL GOVERNMENT SPENDING GROSS DOMESTIC PRODUCT HARD PEG IMBALANCES IMPORT INDUSTRIAL COUNTRIES INDUSTRIAL ECONOMIES INFLATION INSTRUMENTAL VARIABLE INTERNATIONAL BANK INTERNATIONAL ECONOMICS INTERNATIONAL MARKETS INTERNATIONAL MONEY INTERNATIONAL RESERVES INTERNATIONAL TRADE LONG RUN EQUILIBRIUM LONG-RUN EQUILIBRIUM LOSS OF COMPETITIVENESS MACROECONOMIC POLICY MACROECONOMICS MONETARY ARRANGEMENTS MONETARY ECONOMICS OPEN ECONOMIES OVERVALUATION PANEL DATA ESTIMATION PEG PERMANENT SHOCK POLICY EVALUATION POLICY RESEARCH POLITICAL ECONOMY POSITIVE COEFFICIENT POVERTY REDUCTION PRODUCTIVITY PURCHASING POWER PURCHASING POWER PARITY REAL APPRECIATION REAL DEPRECIATION REAL EFFECTIVE EXCHANGE RATE REAL EXCHANGE REAL EXCHANGE RATE REAL EXCHANGE RATE MISALIGNMENT REAL EXCHANGE RATE MISALIGNMENTS REAL EXCHANGE RATES REAL GDP REAL SHOCKS REAL TERMS RELATIVE PRICE RELATIVE PRICES SPEED OF ADJUSTMENT STATISTICAL ANALYSIS SUSTAINABLE CAPITAL TRADABLE GOODS TRANSACTION TRANSACTION COSTS UNDERVALUATION WAGES WORLD DEVELOPMENT INDICATORS This paper models empirically the short and long-term behavior of the real exchange rate misalignment -- a key variable in academic and policy circles. The equilibrium real exchange rate is derived from a theoretical model with intertemporal external equilibrium and internal equilibrium (in traded and non-traded markets) based on the current account dynamics and Harrod-Balassa-Samuelson productivity, respectively. This provides a bridge between theory and empirics that links the real exchange rate and its fundamentals (terms of trade, the ratio of net foreign assets to gross domestic product, and productivity differentials). The paper contributes to the literature by: (a) estimating an unrestricted vector error correction model that examines the short-term dynamics of real exchange rate misalignments and links these deviations with shocks to fundamentals from 1970 to 2010, and (b) computing the speed of reversion of real exchange rate misalignments with respect to a fundamentals-based equilibrium level. The paper reconciles two strands of the empirical literature that estimate the half-life of purchasing power parity deviations: one, the linear adjustment model that renders the consensus half-life estimates of purchasing power parity deviations, and another, the non-linear adjustment model of purchasing power parity deviations. The model estimates the half-life of real exchange rate deviations from their fundamental equilibrium at approximately 2.8 years. Consequently, about 25 percent of the real exchange rate deviation from its equilibrium level is corrected in the next year. Approximately 43 percent of the countries in the sample have a half-life of real exchange rate deviations from equilibrium less than 2.5 years -- which is consistent with predictions from non-linear mean reversion models. 2013-07-10T19:37:03Z 2013-07-10T19:37:03Z 2013-04 http://documents.worldbank.org/curated/en/2013/04/17582694/estimating-half-life-theoretically-founded-real-exchange-rate-misalignments http://hdl.handle.net/10986/14450 English en_US Policy Research Working Paper;No.6411 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, D.C. Publications & Research :: Policy Research Working Paper Publications & Research |