Real Exchange Rate Misalignment: Prelude to Crisis?

54 Pages Posted: 25 May 2006

See all articles by David Kemme

David Kemme

University of Memphis - Economics

Saktinil Roy

Athabasca University

Multiple version iconThere are 2 versions of this paper

Date Written: October 2005

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

JEL Classification: F31, F36, P17

Suggested Citation

Kemme, David M. and Roy, Saktinil, Real Exchange Rate Misalignment: Prelude to Crisis? (October 2005). William Davidson Institute Working Paper No. 797, Available at SSRN: https://ssrn.com/abstract=904372 or http://dx.doi.org/10.2139/ssrn.904372

David M. Kemme (Contact Author)

University of Memphis - Economics ( email )

Memphis, TN 38152
United States
(901)678-5408 (Phone)
(901)678-2685 (Fax)

Saktinil Roy

Athabasca University ( email )

22 Sir Winston Churchill Avenue
Suite 301
Saint Albert, Alberta T8N 1B4
Canada
780-418-7545 (Phone)

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