Real Exchange Rate Misalignment: Prelude to Crisis?

David Kemme () and Saktinil Roy ()

No wp797, William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: A model of the long run equilibrium real exchange rate based upon macroeconomic fundamentals is employed to calculate real exchange rate misalignments for Poland and Russia during the 1990s using the Beveridge and Nelson (1981) decomposition of macrofundamentals into transitory and permanent components. Short run movements of the real exchange rate are estimated with ARIMA and GARCH error correction specifications. The different nominal exchange rate regimes of the two countries generate different levels of misalignment and different responses to exogenous shocks. The average misalignment in Russia is substantially greater than that in Poland, indicating incipient pressures to devalue the ruble immediately preceding the August 1998 crisis. The half life of an exogenous shock is found to be much shorter for Poland than for Russia in the pre-crisis period. Dynamic forecasts indicate that the movements of the real exchange rate in the post-crisis period are significantly different from those in the pre-crisis period. Thus, the currency crisis in Russia could not be anticipated with the movements of the real exchange rate estimated with the macroeconomic fundamentals.

Keywords: Russia; Poland; equilibrium real exchange rates; misalignment; cointegration; exogenous shocks; macroeconomic crises (search for similar items in EconPapers)
JEL-codes: F31 F36 P17 (search for similar items in EconPapers)
Pages: pages
Date: 2005-10-01
New Economics Papers: this item is included in nep-cba, nep-fmk, nep-for, nep-ifn and nep-tra
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Citations: View citations in EconPapers (6)

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Journal Article: Real exchange rate misalignment: Prelude to crisis? (2006)
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