absolute value). Second, the ‘temporary’ changes in the fundamentals and the exogenous
variables may be such that they drive the real exchange rate away from the long run equilibrium
for a prolonged period.
Figures 1, 2, and 3 present the actual real exchange rate and the short run real exchange rate
estimated from the error correction model for Poland and Russia, respectively. They indicate that
the estimated error correction equations capture the movements of the real exchange rates in the
short run very well. 33
--Lnplreer ----lnplreerf
Fig 1. Poland, Actual and Fitted Real Exchange Rates (log), specification 2
* LNPLREER: actual log real exchange rate; LNPLREERF: fitted log real exchange rate
33 Moreover, although not reported here, the within sample forecast error measures (Root Mean Squared Errors,
Mean Absolute Errors, and Mean Absolute Percent Errors) indicate the fitted equations capture the movements of
the observed real exchange rates in the short run.
34