Real Exchange Rate Misalignment: Prelude to Crisis?

nominal rate is fixed, a positive inflation differential with respect to the foreign countries will
appreciate the currency. In addition, higher domestic inflation, if brought about by an increase in
demand, implies a higher rate of interest, which, in turn, increases net capital inflows. This
increases the rate of inflation and overvalues the currency further. However, nearing 2001, the
real exchange rate for Russia is found to be approaching the equilibrium values.

Fig 4. Poland and Russia: real exchange rate misalignments

Misalignment, M = log(e)- log(e^eq)

RUMISAL: misalignment for Russia; PLMISAL: misalignment for Poland

These results corroborate the claim by Chapman and Mulino (2000) and Kharas, Pinto and
Ulatov (2001) that the Russian crisis has features in common with first generation crisis models:
the overvalued currency and the government’s inability to manage the fiscal deficit were
inconsistent, which ultimately led to the abandonment of the exchange rate regime itself. Finally,
it is found that the average misalignment in Russia for the entire period is 8.8%, 150% greater

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