Article thumbnail

Real Exchange Rate Misalignment: Prelude to Crisis?

By David M. Kemme and Saktinil Roy


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.Russia, Poland, equilibrium real exchange rates, misalignment, cointegration, exogenous shocks, macroeconomic crises

OAI identifier:

To submit an update or takedown request for this paper, please submit an Update/Correction/Removal Request.

Suggested articles


  1. (2002). A case study of a currency crisis: the Russian default of 1998. Federal Reserve Bank of St.
  2. (1979). A model of balance of payments crises,
  3. (1999). A Model of the Real Exchange Rate Determination in Transition Economies,
  4. (1981). A new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle.
  5. (1994). A Review of methods of estimating cointegrating relationships.
  6. (2000). A simple model of monetary policy and currency crisis.
  7. (1999). An assessment of real exchange rate movements in the transition economies of central and Eastern Europe.
  8. (1991). An empirical macroeconomic model for policy design: the case of Chili.
  9. (2000). Assessing Financial Vulnerability: An Early Warning System for Emerging Markets. Institute for International Economics:
  10. (1990). Asymptotic properties of residual based tests for cointegration.
  11. (1991). Asymptotically efficient estimation of cointegration regressions.
  12. (1988). Black Market Premia, Exchange Rate Unification, and Inflation in Sub-Saharan Africa. World Bank (mimeographed),
  13. (1987). Co-integration and error-correction: representation, estimation, and testing.
  14. (1996). Currency crashes in emerging markets: an empirical treatment.
  15. (2001). Currency crises and monetary policy in an economy with credit constraints.
  16. (2003). Currency crises in transition economies: an empirical analysis.
  17. (2000). Currency Crises. The National
  18. (2000). Determinants of the real exchange rate, misalignments and implications for growth in Poland.
  19. (2002). Does the productivity-bias hypothesis hold in the transition? Evidence from five CEE economies in the 1990’s.
  20. (1987). Dollars, Debts and Deficits.
  21. (1978). Dynamic adjustment in the Heckscher-Ohlin-Samuelson model.
  22. (1986). Economic adjustment and the Real Exchange Rate. In:
  23. (1982). Equilibrium and disequilibrium exchange rates. Zeitschrift fur Wiretschafts und Sozialwissenschaften 102.
  24. (1989). Equilibrium exchange rates for the G7.
  25. (1994). Estimates of FEERs. In:
  26. (1994). Estimating Long Run Equilibrium Real Exchange Rates. In:
  27. (1991). Estimating long-run economic equilibria.
  28. (2003). Estimating the fundamental equilibrium exchange rate of central and eastern European countries: the EMU enlargement perspective. CEPII Research Center, Working Papers.
  29. (1989). Evaluating blueprints for the conduct of international macropolicy.
  30. (2004). Evidence from two transition economies.
  31. (1996). Exchange market mayhem: the antecedents and aftermath of speculative attacks.
  32. (1999). Exchange Rate Misalignment: An Overview. In: Hinkle
  33. (2003). Exchange Rate Misalignment: Macroeconomic Fundamentals as an Indicator of Exchange Rate Crisis in Transition Economies. In:
  34. (1998). Exchange rate regimes and the stability of trade policy in transition economies.
  35. (2000). Explaining Russia’s currency and financial crisis.
  36. (1986). Exploring equilibrium relationships in econometrics through static models: some Monte Carlo evidence.
  37. (1993). External shocks, purchasing power parity, and the equilibrium real exchange rate.
  38. (1991). FEERs and the ERM. National Institute Economic Review.
  39. (1998). Financial crisis in Asia and Latin America: then and now.
  40. (2000). Forecasting financial crisis in emerging market economies.
  41. (1996). Growth, nontradables, and price convergence in the Baltics.
  42. (1944). International Currency Experience: Lessons of the Interwar Period (Geneva: Leaugue of Nations).
  43. (2001). Interpreting real exchange rate movements in transition countries. International Monetary Fund, Working Paper WP/01/56.
  44. (1998). Introduction: exchange rates, capital flows, and commercial policies in transition economies.
  45. (2002). Investigating the Balassa-Samuelson hypothesis: do we understand what we see? A panel study.
  46. (1998). Leading indicators of currency crises.
  47. (2000). Long run purchasing power parity, prices and exchange rates in transition: the case of six central and east European countries.
  48. (1994). Macroeconomic Adjustment and Growth Division, Country Economics Division,
  49. (1998). Macroeconomic fragility and exchange rate vulnerability: a cautionary record of transition 47 economies.
  50. (1989). Macroeconomic policies for structural adjustment. Policy Research Working Paper Series no. 247. World Bank,
  51. (1996). Models of Currency Crises with self-fulfilling features,
  52. (2000). Monetary policy regimes and real exchange rates in Central Europe’s transition economies,
  53. (1973). Money Devaluation and Non-traded Goods.
  54. (2005). No. 794: Collective Action and Post-Communist Enterprise: The Economic Logic of Russia’s Business Associations William
  55. (1998). Pegging out: lessons from the Czech exchange rate crisis.
  56. (1999). Predicting currency crisis: the indicators approach and an alternative.
  57. (1992). Properties of fundamental equilibrium exchange rate models of the UK Economy. National Institute Economic Review
  58. (2002). Purchasing power parity in the transition: the case of the Romanian leu against the dollar.
  59. (2003). Purchasing power parity in three transition economies.
  60. (1994). Real and Monetary Determinants of Real Exchange Rate behavior: Theory and Evidence from Developing Countries. In:
  61. (2001). Real exchange rate dynamics in transition economies: a nonlinear analysis.
  62. (1995). Real Exchange Rates and Macroeconomic Adjustment in SubSaharan Africa and other Developing Countries. African Research Consortium (November).Nairobi,
  63. (2005). Real exchange rates in Central and Eastern Europe, What scope for the underlying fundamentals? Emerging Markets Finance and Trade,
  64. (1989). Real Exchange Rates, Devaluation and Adjustment: Exchange Rate Policy in Developing Countries.
  65. (2005). Recent Papers The entire Working Paper Series may be downloaded free of charge at: CURRENT AS OF 1/13/06 Publication Authors Date No. 797: Real Exchange Rate Misalignment: Prelude to Crisis? David Kemmeand Saktinil
  66. (1999). Single Equation Estimation of the Equilibrium Real Exchange Rate. In: Hinkle
  67. (2001). Sources of real exchange rate fluctuations in transition economies: the case of Poland and Hungary.
  68. (1992). Speculative attacks and models of balance of payments crisis.
  69. (1988). Statistical analysis of cointegrating vectors.
  70. (1987). Targets and indicators: a blueprint for the international coordination on economic policy. Policy Analysis
  71. (1974). Tariffs and Non-Traded Goods.
  72. (1986). Tariffs, terms of trade and real exchange rates in an intertemporal model of current account.
  73. (1988). Testing for common trends.
  74. (2003). The BalassaSamuelson effect in Central and Eastern Europe: myth or reality?
  75. (1987). The Beveridge-Nelson decomposition of economic time series: a quick computational method.
  76. (1999). The contributions of domestic and external factors to Latin American devaluation crises: an early warning systems approach. International Finance Discussion Paper 645. Board of Governors of the Federal Reserve System.
  77. (1985). The exchange rate system. Policy Analysis
  78. (1989). The great crash, the oil price shock, and the unit root hypothesis.
  79. (1994). The logic of currency crises.
  80. (1999). The Long Run Real Exchange Rate : Conceptual Issues and Empirical Research. In
  81. (1987). The macroeconomics of successful development. NBER Macroeconomics Annual.
  82. (1986). The Order of Liberalizition of the Current and Capital Accounts of the Balance of Payments. In:
  83. (1988). The Real Exchange Rate Since Floating: Market Fundamentals or Bubbles.
  84. (1994). The robustness of equilibrium exchange rate calculations to alternative assumptions and methodologies. In:
  85. (2004). The role of oil prices and the real exchange rate in Russia’s economy – a cointegration approach,”
  86. (2000). The transition crisis in Bulgaria.
  87. (1999). The twin crisis: the causes of banking and balance-of-payments problems.
  88. (1999). The Two-Good Internal RER for Tradables and Nontradables. In: Hinkle
  89. (1986). The welfare effects of trade and capital market liberalization.
  90. (1994). Time Series Analysis,
  91. Tober S.,2005. “What is behind the real appreciation of the accession countries’ currencies? An investigation of the PPI-based real exchange rate,” Economic Systems,
  92. (2004). Towards the Estimation of Equilibrium Exchange Rates for CEE Acceding Countries: Methodological Issues and a Panel Cointegration Perspective,” European Central Bank, Working Paper Series No.
  93. (1999). What caused the Asian crisis: an early warning system approach.
  94. (2000). Why did the ruble collapse in