10. Conclusion
Long run equilibrium real exchange rates, the short run movements of the real exchange rates,
and the corresponding misalignments have been estimated for Poland and Russia. The results
explain short run and long run movements of the real exchange rates quite well in light of the
exchange rate and macroeconomic stabilization policies adopted by the respective governments.
The results confirm the suggestions by Brada (1998) and Drabek and Brada (1998) that due to
liberalized capital account policies, the transition economies, in general, had large capital inflows
in the early transition period that resulted in high rates of inflation and overvalued real exchange
rates. The results also confirm the claim by Halpern and Wyplosz (1997), Balazs (2002), de
Broeck and Slok (2001) that productivity growth in the traded goods sector appreciated the real
exchange rates in the transition economies. The response to exogenous shocks in each country
clearly indicates that the more flexible exchange rate regime in Poland allowed the zloty to
return to equilibrium much more quickly than the Ruble did in the less flexible exchange rate
regime in the pre-crisis period in Russia. The calculations of misalignments for Poland indicate
that as the nominal exchange rate regime became more flexible, real misalignment decreased.
For Russia the misalignment results suggest that significant overvaluation of the ruble, nominal
exchange rate rigidity, and mistaken macroeconomic policies in the pre-crisis period are the
source of the currency crisis in Russia. Moreover, there were incipient pressures to devalue the
ruble around the time of the crisis. Finally, the dynamic out of sample forecasts of the real
exchange rate for the post-crisis period indicate that macroeconomic fundamentals and other
short run variables in the pre-crisis period may not explain the movements of the real exchange
rate in the post-crisis period for Russia.
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