Real Russian Ruble Exchange Rate Dynamics

<p style="text-align: justify;">The traditional theory specifies the real exchange rate dynamics as fluctuations in the relative price of non-traded to traded goods. In fact, there are many studies, showing the results, which stand in stark contrast to the implications of traditional theory. Modern research shows that the contribution of the distribution sector has a significant impact on the real exchange rate (i.e. difference between retail prices and prices at-the-dock, the so-called &ldquo;relative distribution wedge&rdquo;). The aim of this paper is an empirical estimation of contributions to the dynamics of the real exchange rate of its components (traded, non-traded and &ldquo;relative wedge&rdquo;) and identifying factors which define contributions of the real exchange rate components. Empirical analysis was conducted on data from eight countries for the period 1995-2013. Decomposition of variance was used for calculating contributions of the component to the real exchange rate, and an econometric model was used to identify factors, which define components contributions to the dispersion of the real exchange rate. Based on the results of this study it can be concluded that the distribution sector&#39;s contribution to the dynamics of the real exchange rate is substantial and it must be taken into account for building realistic macroeconomic models. The developed econometric model shows that the size of the economies of countries - trade partners and de-facto exchange rate regime are the factors that determine the contribution of the &ldquo;relative distribution wedge&rdquo;.</p>