Real Exchange Rate Misalignment: Prelude to Crisis?

7. The Effect of Exogenous Shocks

The half-lives of exogenous shocks for both countries are calculated and are presented in
Table 9.³⁴ We consider the coefficient of the error correction term in specification 2, Table 7 for
Poland, and in specification 3 and 4, Table 8, for Russia. These are greater than what Baffes,
Elbadawi, and O’Connell (1999) calculate for Burkina Faso and Cote d’Ivoire. However, these
are clearly consistent with the respective monetary authority’s exchange rate policies. In the
early years of transition Russia authorities maintained a fairly rigid managed float within a band,
but as a result of the onset of the crisis in August 1998 was forced to float the Ruble. During the
pre-crisis period the real exchange rate equilibrates mainly via changes in the foreign and
domestic price levels, a process that could be quite lengthy. Thus, the half life for the pre-crisis
period is much greater than that for the entire sample, as expected. The foreign exchange regime
in Poland was a float within a very wide band, then a free float through this period. Thus the real
exchange rate then equilibrated via both changes in the nominal exchange rate and changes in
foreign and domestic price levels.

Table 9

Speed of automatic adjustment to correct 50% of exogenous
shock

Country                          Required no. of years

Poland, Spec. 2, Table 7, entire period            1.32

Russia, Spec. 3, Table 8, entire period             1.30

Russia, Spec. 4, Table 8, pre-crisis period         4.11

³⁴ Given the coefficients, the speed of automatic adjustments from exogenous shocks is

(1 - α) = (1- ∣β∣)^τ ,

where α is the percentage correction, β is the estimated coefficient of EC(-1), and T is the required number of
periods to correct the shock. See Baffes, Elbadai and O’Connell (1990), p. 442.

36

<<   34   35   36   37   38   39   40   >>

More intriguing information