Estimation of the Equilibrium Real Exchange Rate for Russia

Abstract

Following methodological approach proposed by Edwards, the paper estimates empirically Russia's equilibrium real exchange rate (ERER) for the period 1995–2003. ERER is defined as the relative price of non-tradables to tradables consistent with the simultaneous achievement of internal and external balances of the economy. Reduced form solution of simultaneous equations system relates ERER to a set of variables called fundamentals. These variables are identified as terms of trade, production of non-tradables, and capital flows; and the reduced form equation is estimated using Johansen cointegration technique. Effects of monetary and fiscal policies’ variables on the short-run dynamics of the real exchange rate and the speed of its adjustment towards the equilibrium are also investigated within a framework of error-correction model.