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Real exchange rate misalignment: Prelude to crisis?

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  • Kemme, David M.
  • Roy, Saktinil

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.

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Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 30 (2006)
Issue (Month): 3 (October)
Pages: 207-230

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Handle: RePEc:eee:ecosys:v:30:y:2006:i:3:p:207-230

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Citations

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Cited by:
  1. Dubas, Justin M., 2009. "The Importance of the Exchange Rate Regime in Limiting Misalignment," World Development, Elsevier, vol. 37(10), pages 1612-1622, October.
  2. Camelia Minoiu & Patrick A. Imam, 2008. "Mauritius: A Competitiveness Assessment," IMF Working Papers 08/212, International Monetary Fund.
  3. Dağdeviren, Sengül & Ogus Binatli, Ayla & Sohrabji, Niloufer, 2011. "Misalignment under different exchange rate regimes: the case of Turkey," MPRA Paper 46774, University Library of Munich, Germany.
  4. Ndlela, Thandinkosi, 2010. "Implications of real exchange rate misalignment in developing countries: theory, empirical evidence and application to growth performance in Zimbabwe," MPRA Paper 32710, University Library of Munich, Germany.
  5. David M. Kemme & Saktinil Roy, 2005. "Real Exchange Rate Misalignment: Prelude to Crisis?," William Davidson Institute Working Papers Series wp797, William Davidson Institute at the University of Michigan.
  6. Ibarra, Carlos A., 2011. "Import elasticities and the external constraint in Mexico," Economic Systems, Elsevier, vol. 35(3), pages 363-377, September.
  7. You, Kefei & Sarantis, Nicholas, 2012. "A twelve-area model for the equilibrium Chinese Yuan/US dollar nominal exchange rate," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(1), pages 151-170.

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