mathematics
Article
Mathematical Exchange Rates Modeling: Equilibrium and
Nonequilibrium Dynamics
Anton Kuzmin
Citation: Kuzmin, A. Mathematical
Exchange Rates Modeling:
Equilibrium and Nonequilibrium
Dynamics. Mathematics 2022, 10, 4672.
https://doi.org/10.3390/
math10244672
Academic Editor: Panagiotis-Christos
Vassiliou
Received: 11 November 2022
Accepted: 6 December 2022
Published: 9 December 2022
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Mathematics 2022, 10, 4672. https://doi.org/10.3390/math10244672
Department of Mathematics, Financial University under the Government of the Russian Federation,
125167 Moscow, Russia; ayukuzmin@fa.ru
Abstract: The development of the author’s concept of the International Flows Equilibrium Exchange
Rate (IFEER) is the basis for the mathematical exchange rate modeling of two interconnected equal
economies. IFEER-concept allows modeling the exchange rate dynamics of relatively medium-term
equilibrium and short- and long-term disequilibrium. Discrete and integral versions of the concept are
the basis for further modeling. New structural models of medium-, short- and long-term dynamics
and new final structural dependencies of the exchange rate on the system of fundamental factors are
the main results. The models include mathematically formalized export-import and capital flows
and international competitive advantages indicators. The modeling allowed the revealing of the
structural pricing mechanism of the exchange rate dynamics from new positions. We verify the US
dollar to the Russian ruble exchange rate modeling during periods of financial and economic crises
in recent Russian history, based on a systematic analysis of the exchange rate policy. Because of the
analysis, the fall in export prices of oil and other energy carriers in international markets, the rise
in consumer prices within the country, and the fall in aggregate output are the main reasons for
the fall of the Russian ruble. The conducted modeling allows for the evaluation of the short-term
contribution to the crisis depreciation dynamics. The mathematical tools allow for the development
of the decision-making process on the exchange rate regulation.
Keywords: mathematical modeling; exchange rate; international flows equilibrium exchange rate;
balance of payments; capital movement; short-term disequilibrium; long-term dynamics; Russian
ruble; US dollar
MSC: 91-10
1. Introduction
The exchange rate is one of the most important and complex macroeconomic indi-
cators. It embodies both all the troubles and the positive trends of the economy. At the
microeconomic level, the exchange rate signals market participants about the quality of
currency and monetary policy measures. Thus, in the absence of other changes in the
financial and economic environment, the public perceives any form of devaluation of the
national currency as a weak monetary policy compared to the policy in other countries.
In the context of this work, the research of R. Moreno [1] identified three main direc-
tions of the monetary and monetary policy of central banks in developing countries:
• inflation control,
• maintaining the stability of foreign trade and capital flows,
• maintaining overall financial stability within the country.
It is significant that all three main directions of monetary policy have special attention
to the exchange rate (in real or nominal terms) and its dynamics. This only underlines
the importance of the exchange rate policy of central banks in the system of available
macroeconomic management tools.
https://www.mdpi.com/journal/mathematics
Mathematics 2022, 10, 4672 2 of 19

Mathematical methods are widely used directly in modeling modern international

world economic relations, currency and economic unions, capital movements and exchange
rates, macroeconomic management.
The economic scientific literature has maintained a steady interest in structural fun-
damental factor models of exchange rates over the past decades. The results of the study
conducted by C.M. Engel, N.C. Mark, and K.D. West are indicative, which are reflected in
the title of the article: “Exchange Rate Models Are Not as Bad as You Think” [2].
One of the first and most meaningful is the monetary approach to the exchange rate.
The model of P. Hooper and J. Morton [3] with tight prices and real financial well-being
largely predetermined the development of this direction. Following them, M. Mussa [4–6]
and J. Frenkel [7,8]) carried out structural modeling of the exchange rate and the balance of
payments. The continuation is the model of J. Frenkel and H. Johnson [9].
A modification of the classic monetarist exchange rate models is the portfolio balance
model. In it, supply and demand in the financial assets market determine the equilibrium
exchange rate [10].
The development of the theory has now led to the emergence of a new broad class of
models that consider the behavior of nominal and real exchange rates. Dynamic stochastic
general equilibrium models (DSGE models) include a number of assumptions regarding
nominal rigidity and market failures. One of the significant representatives of this class
is the monopolistic competition model of two equal open economies developed by M.
Obstfeld and K. Rogoff [11].
C.M. Engel, N.C. Mark and K.D. West [2], R. MacDonald and M.P. Taylor [12], J. Chen
and Mark N. C. [13], V.-W. Cheung, M. Chinn, A.G. Pascual [14], V. Dropsy [15], and
others show the high applicability of fundamental determinants models in practice. The
research was conducted on currency pairs based on both “real” (US dollar, British pound,
Canadian dollar) and “past” (German mark, French franc) currencies. Econometric studies
of fundamental determinants models based on Euro developed by I. Chowdhury [16], R. H.
Clarida, L. Sarno, M.P. Taylor, G. Valente [17], B. Kempa [18] show the same.
On the other hand, the econometric works of K. Iwatsubo, I. W. Marsh [19], R. Reb-
itzky [20], S. Heiden, C. Klein, B. Zwergel [21] emphasize the influence of expectations or
the appearance of fundamental data on the dynamics of exchange rates.
At the same time, little attention is paid to the mathematical modeling of short-
term disequilibrium. First, R. Dornbush’s models [22,23] show short-term exchange rate
overshooting. The development of this topic is the work of the author [24].
The author does not aim in this work to comprehensively describe the literature on this
topic due to its volume. It is necessary to mention, in addition, the classical mathematical
fundamental factor models of exchange rates R.A. Mundell [25], L. Killian [26], A.C. Stock-
man [27], P.B. Clark and R. MacDonald [28], which are the basis of modern economic theory.
Each model includes its own system of fundamental factors. However, macroeconomic
factors related to real output and financial indicators are the basis.
In the context of these studies, we note works that pay close attention to the short-
and long-term exchange rate dynamics. The paper [29] used the Long Short-Term Memory
Networks (LSTM) framework to predict the exchange rate of Ghanaian Cedis to US Dollar,
Euro, and British Pound, using historical macroeconomic data. In the context of this
work, the composition of these factors is indicative: fundamental macroeconomic variables,
past exchange rates, and commodity prices (gold, cocoa, and crude oil). M. Li, F. Qin,
and Z. Zhang [30] employed a portfolio approach to assessing the effect of exchange rate
expectation on Chinese Rénmínbì (RMB) internationalization with significant attention to
short-term capital flows. The paper [31] investigated the long-term relationship between
exchange rate level, volatility, and international trade performance. The results of the work
emphasize the importance of the relationship between these indicators.
The productive applied tools for the study of nonlinear financial dynamics have an
interdisciplinary basis. Discrete neurons have received extensive attention as an effective
model for studying neural dynamics, including the discrete-time Courbage-Nekorkin-
Mathematics 2022, 10, 4672 3 of 19

Vdovin model [32] and low-dimensional deterministic Rulkov map model [33]. They
are reliable, simple, numerically stable, and show high computational efficiency. Rulkov
neuron has shown very rich nonlinear dynamic behavior and remarkable characteristics.
This is also widely used in financial computing. G. Orlando, M. Bufalo, and R. Stoop [34]
find that a deterministic model performs at least as well as one of the best stochastic models
(ARIMA-GARCH) in terms of simulations. However, it may offer additional insight into
the essential mechanisms that drive financial markets.
As can be seen, different methods and approaches are the focus when modeling the
exchange rate. At the same time, from the standpoint of structural and analytical modeling,
the vast majority of known models of economic theory cannot provide adequate results for
assessing the dynamic mechanism of the equilibrium real or nominal exchange rate. So,
some of them are based on the principles of deviation from a steady state. The exchange
rate is often expressed in terms of individual preferences based on the theory of purchasing
power parity (PPP). However, V.-W. Cheung, M. Chinn, A. Pascual [14] came to a negative
conclusion when studying the ability of the PPP approach to predict future changes in the
nominal exchange rate.
Structurally, the modeling and analysis of the exchange rate in most well-known
models of economic theory are limited to the framework of the current balance. They also
do not explicitly operate with capital flows.
Changes in the current account balance and the competitive advantage indicator are
expressed in terms of changes in the exchange rate. However, the role of the exchange rate
in the regulation of the balance of payments and the role of the competitive advantages
indicator in specific foreign trade flows (and, partly, in capital flows) requires modeling
development and disclosure of the exchange rate formation mechanism.
However, the fundamental macroeconomic factors continue to be basic drivers of the
dynamics of exchange rates. In this paper, we develop a systematic approach to model the
dynamics of exchange rates of two equal, interconnected economies based on international
flows of the balance of payments. This distinguishes the development of this article from
the author’s models of the ruble exchange rate, made according to the methodology “Small
Economy—the Rest of the World” [35,36]. This aims to further development of the author’s
concept of IFEER (International Flows Equilibrium Exchange Rate modeling). The new
exchange rate models will explicitly include mathematically formalized export-import
and capital flows and international competitive advantages indicators. The approach will
allow us to study the exchange rate dynamics relative to medium-term equilibrium and
long-term and short-term disequilibrium.
The identification of the structural dynamic dependence of the exchange rate on its
main factors makes it possible to simplify the development of sound management decisions
on exchange rate regulation.

2. IFEER Conceptual Approach: Discrete and Integral Variants

Let us consider all N real market transactions at nominal exchange rates
ei , i ∈ (1, N )(direct quote) on the foreign exchange market that occurred over a certain period.
Denote ei , Di , Ri in the i-th operation: the nominal exchange rate, the amount in a
certain foreign currency, and the amount in the national currency, respectively.
These variables are connected by ratios: ei Di = Ri . Therefore, ei = Ri /Di .
The contribution of each transaction is different. It depends on the volume of the transaction.
The applied economic and mathematical modeling methods in studying the exchange
rate dynamics are directly determined by the exchange rate management regime.
First, we are interested in the free-floating regime of the world’s major currencies.
Mathematics 2022, 10, 4672 4 of 19

Under these conditions, we define the synthetic value of the exchange rate as the sum
of exchange rates weighted by the volume of their market transactions in the corresponding
foreign currencies:
N N
Di
e≡∑ × ei = ∑ w ( i ) × ei (1)
N
i =1 i =
∑ Dj 1
j =1

The weight function w(i) defines the contribution of the particular i-th transaction,
depending on the volume in the foreign currency:

Di
w (i ) = .
T
∑ Dj
j =1

N
The weight limit is: ∑ w(i ) = 1.
i =1
Then you can get a summation by i:
N
∑ Ri
,
N
Di R
e= ∑ × i = i =1 N
i =1
N
∑ Dj
Di ∑ Dj
j =1
j =1

As a result, the weighted average exchange rate for a certain period is equal to the sum
of the ratio of funds in domestic and foreign currencies on the foreign exchange market
during this period. In terms of the above, with the separation of operations on current
accounts and capital flows, it is possible to disaggregate the flow functions of the country’s
balance of payments after reordering transactions:

L N
( ∑ Ri CA + ∑ Ri K ) ( I + K− )
, ,
e= L N =
i =1 i = L +1
( ∑ Di CA + ∑ Di K ) (E + K+ )
i =1 i = L +1

Here funds with the upper index CA belong to the current balance; funds with the
upper index K belong to the capital flows balance. For convenience, the units are designated:

L N
I = ∑ Ri CA , K− = ∑ Ri K ,
i =1 i = L +1
L N
E = ∑ Di CA , K+ = ∑ Di K .
i =1 i = L +1

In dynamic terms, in the period T we get:

( IT + K T − )
,
eT = , (2)
( ET + K T + )
where ET is the inflow of export foreign exchange earnings, IT is the demand for imports
in the national currency. The capital movement is the outflow of the national currency KT −
and the inflow of foreign currency KT + .
The equality of the parties guarantees the symmetry of the dynamics of their exchange
rates in (2)—in particular, the outflow of capital is the inflow of capital for the opposite side:
Mathematics 2022, 10, 4672 5 of 19

( IT + K T − )
,
eT = =
( ET + K T + )
( ET∗ + KT ∗+ )
,
= = (3)
( ET + K T + )
( ET∗ + KT ∗+ )
, ,
1
= = .
( IT∗ + KT ∗− ) e∗T
The asterisk (*) hereafter refers to the economic indicators of the opposite side.
Next, consider the integral version of this approach. It can be useful to justify short-
term modeling.
Let D(t) and R(t) be related cash flows in foreign and national currencies on the market.
The analogue (1) in differential form at moment t is:
, ,
∂D (t) ∂R(t)
e(t) = (4)
∂t ∂t

Thus: ,
∂R(t)
∂t
, = e(t) (5)
∂D (t)
∂t
We introduce the weight function w(t) for the exchange rate by analogy with the
previously used discrete version. In this integral version, the weight function w(t) is also
based on the total volume of the foreign currency funds in a period T:
 , 
∂D (t)
 
 ∂t 
w(t) =  . (6)
 
,
 R ∂D (t) 
 dt 
T ∂t

As a result, we will define the exchange rate as an integral:

Z
e( T ) = w(t)e(t)dt. (7)
T

Let us substitute the weight Function (6) in Formula (7):

 ,   , 
∂D (t) ∂D (t)
   e(t) 
Z Z  ∂t  Z  ∂t 
e( T ) = w(t)e(t)dt = e(t)dt ==  dt.
   
 , ,
 R ∂D (t)   R ∂D (t) 
T T  dt  T  dt 
T ∂t T ∂t
Mathematics 2022, 10, 4672 6 of 19

After that, we can take the denominator beyond the integral:

 ,   , 
∂D (t) ∂R(t)
 e(t)   
R ∂t  R ∂t 
e( T ) =  , dt =  , dt =
T  R ∂D (t) T  R ∂D (t)
 
 
dt dt
T ∂t T ∂t
,
R ∂R(t)
dt
T ∂t
= ,
R ∂D (t)
dt
T ∂t

As a result, we will disaggregate the streaming functions according to the balance

of payments:
, , ,
R ∂R(t) R ∂RCA (t) R ∂RK (t)
dt dt + dt
T ∂t T ∂t T ∂t
e( T ) = , = , , (8)
R ∂D (t) R ∂DCA (t) R ∂D K (t)
dt dt + dt
T ∂t T ∂t T ∂t

Let us define the components of this Formula (8):

,
R ∂RCA (t)
dt = IT ,
T ∂t
,
R ∂RK (t)
dt = KT − ,
T ∂t
,
R ∂DCA (t)
dt = ET ,
T ∂t
,
R ∂D K (t)
dt = KT +
T ∂t

At this conceptual level, the exchange rate dependence has a dynamic form in the
period T:
( IT + K T − )
,
e( T ) = eT = . (9)
( ET + K T + )
The results of Formulas (3) and (9) coincide. This allows us to apply a conceptual
IFEER approach to modeling the exchange rate on various time horizons, including a
short-term plan.

3. Mathematical Exchange Rate Modeling: Medium-Term Dynamics

The two-period model is the basis of mathematical constructions.
Next, we will use the lower symbol t instead of T for the selected period as an indicator
of the dynamism of the process in accordance with the accepted designations in science.
Here and further, we will also use lowercase letters to denote parameters and indicators of
time dynamics and capital letters to denote the qualitative attribute of the variables.
Mathematics 2022, 10, 4672 7 of 19

The decisions of exporting manufacturers determine the volume of export foreign

exchange earnings delivered to the domestic market in the period t (next, we will explain
the economic meaning of this dependence):

1 x δ z
E(t) = Et = k E Pt∗ ( Qt x+1 Qt−1 x+1 ) (e R ) (10)
t−1

where: Qt − the real national product,

Pt ∗ —the cumulative foreign price level.
Let us explain the dependence (10). Depending on (10), export foreign exchange
earnings in the financial market are part k E of total production Qt in foreign prices Pt ∗ . At
the same time x 6= −1, k E ¯ constant.
Here the aggregate output is averaged in dynamics. The indicators of the degree with
it have the following weights:
1 x
+ =1
x+1 x+1
The key fundamental factor of decision-making in (10) in the period t − 1 is the real
exchange rate, which represents an indicator of international competitive advantages:

Pt∗−1
,
R
e t −1 = e t −1 . (11)
Pt−1

The configurable parameters in the exponents δ and z take into account the magnitude
of the responses of the export streaming function to changes in the aggregate product and
the real exchange rate.
The export foreign exchange earnings of opposite sides according to the construction
of the model:
1 x
I (t) = It = Et∗ = k I Pt ( Qt ∗ x+1 Qt−1 ∗ x+1 )λ (e∗tR−1 )−y =
1 x (12)
= k I Pt ( Qt ∗ x+1 Qt−1 ∗ x+1 )λ (etR−1 )y .

The degree indicators y and λ are also parameters of the responses of the streaming
function. Dependencies (10) and (12) are related as follows: z − y = x, kI is also a constant.
Here we used the properties of streaming functions:

I ∗ = E , E∗ = I
Next, the proposed IFEER concept makes it possible to include in the mathematical
modeling of the exchange rate such a determinant of the world economy factor as the
movement of capital.
Accordingly, we will put hypotheses about the form of basic dependencies: the capital
inflow functions are part k k+ of total production Qt in foreign prices Pt ∗ , which foreign
investors want to buy at their prices for investment and savings purposes. Thus, the capital
inflow function is an increasing function by aggregate prices and by the real aggregate
product. This function is also increasing by the terms of trade since their increase leads to
an improvement in investment conditions and an increase in the capital inflow.
Let us use the properties of the streaming functions:

K ∗− = K + ,
(13)
K ∗+ = K − .
Mathematics 2022, 10, 4672 8 of 19

Thus, in accordance with the above, we put the functional dependence of the capital inflow:

1 x θ z
K + (t) = Kt + = k K+ Pt∗ ( Qt x+1 Qt−1 x+1 ) (e R ) (14)
t−1

Degree indicators also contain configurable parameters.

Quite symmetrically, the function of capital outflow is:
1 x ρ −y
Kt ∗+ = k K− Pt ( Qt ∗ x+1 Qt−1 ∗ x+1 ) (e∗ R ) (15)
t−1

But in accordance with properties (13), we can rewrite the dependence of capital flows:
1 x ρ y
K − (t) = Kt − = Kt ∗+ = k K− Pt ( Qt ∗ x+1 Qt−1 ∗ x+1 ) (e R ) (16)
t−1

Then,,substituting functional dependencies (10)–(15) into (3) and considering that

1
e ∗ R t −1 = :
e R t −1

1 x λ 1 x ρ
y y
k I Pt ( Qt ∗ x+1 Qt−1 ∗ x+1 ) (e R ) +k K − Pt ( Qt ∗ x+1 Qt−1 ∗ x+1 ) (e R )
t−1 t−1
et = 1 x δ 1 x θ =
z z
k E Pt∗ ( Qt x+1 Qt−1 x+1 ) (e R ) +k K + Pt∗ ( Qt x+1 Qt−1 x+1 ) (e R )
t−1 t−1

1 x ρ 1 x λ−ρ (17)
y
Pt ( Qt ∗ x+1 Qt−1 ∗ x+1 ) (e R ) ( k I ( Q t ∗ x +1 Q t −1 ∗ x +1 ) +k K − )
t−1
= 1 x θ 1 x δ−θ .
z
Pt∗ ( Qt x+1 Qt−1 x+1 ) (e R ) ( k E ( Q t x +1 Q t −1 x +1 ) +k K + )
t−1

We use the properties of indicators λ ≈ ρ, δ ≈ θ and the greater dynamic stability of

1 x δ−θ 1 x λ−ρ
the averaged terms ( Qt x+1 Qt−1 x+1 ) and ( Qt ∗ x+1 Qt−1 ∗ x+1 ) comparatively with the
volatility of internal and external prices. Then in the medium term, let’s put a constant:

1 x λ−ρ
( k I ( Q t ∗ x +1 Q t −1 ∗ x +1 ) + kK− )
δ−θ
= (k) x+1 = const (18)
1 x
(k E ( Qt x +1 Q t −1 x +1 ) + kK+ )

Rewrite (17) in the form:

1 x ρ
Pt ( Qt ∗ x+1 Qt−1 ∗ x+1 ) (k) x+1
et =
1 x θ Pt∗−1 x
Pt∗ ( Qt x+1 Qt−1 x+1 ) (e Pt−1 )
t−1

Let’s move to the left part (et−1 ) x :

  !x
Pt ρ P ρ
x
k ∗ Q t ∗ x +1 Q t − x +1 k t∗−1 Qt−1 ∗ x+1 Qt−1 − x+1
θ θ
et ( e ) =
t−1 Pt Pt−1
Mathematics 2022, 10, 4672 9 of 19

We get after a temporary separation of the variables involved in the modeling:

Pt ∗ x+ρ 1 − x+θ 1
et = k Qt Qt .
Pt∗

For convenience, we will redefine ρ0 = and θ 0 =

ρ θ
x +1 x +1 and project the model to a
multi-period case:

P ( t ) ∗ ∗ ρ0 0
e(t, Q(t), Q∗ (t), P(t), P∗ (t)) = et =k ∗
Q (t ) Q (t )−θ . (19)
P (t)
As a result, we get a dynamic dependence of the exchange rate on the main funda-
mental external and internal macroeconomic factors. This is medium-term dependence.

4. Dynamics of the Russian Ruble Exchange Rate: Empiricism and Practice

The periods of financial and economic crises in recent Russian history in 1998, 2008,
and 2014 are the most fruitful for conducting empirical research.
Note that the USD/RUR exchange rate is a core. The exchange rates of other currencies
to the ruble are calculated through the system of cross-rates.
In this regard, the pricing mechanism of export products of Russian companies, based
on the prices of the main world commodity exchanges in US dollars, is important. Therefore,
we used P* indices, related to the actual export prices of Russian goods, as a determinant.
During the periods under review, different data were available, which is determined by
the peculiarities of the Russian state statistics (according to the Federal State Statistics
Service [37–39]).
The index of average actual export prices was calculated using the formula:

K
P∗ (t) = Pt∗ = ∑ ( Pt∗ (i) × w(i))
i =1

where Pt ∗ (i ) is the price index of the export goods group, w(i ) is the weight of this group
in the total Russian exports. In the entire commodity nomenclature of Russian exports
during these periods, three (K = 3) groups dominated: mineral raw materials, ferrous and
non-ferrous metals, machinery, and equipment. The proportionality coefficients adjusted
the weights so that their sum was 1.
The P* index was constructed by the author due to its absence in official statistics. Its
construction was quite laborious.
The consumer price index is the determinant P. Q is the index of aggregate real output.
Since the interpretation of the Q*-factor is economically difficult, and it is the least volatile,
then Q* = 1 is accepted in calculations:

P(t) 0
e(t, Q(t), P(t), P∗ (t)) =et = k ∗
Q (t )−θ .
P (t)

In the process of verification and analysis of simulation results, we will adjust the
internal parameter of the main research Formula (19). We equate the coefficient k to the
ruble exchange rate to the US dollar at the starting point of the research period.
Provided at the starting point P(start) = 1, P*(start) = 1, Q(start) = 1 the optimization
model is:
2
1 N
N t∑
( ND ( e)t ) →0 min
=1 θ

e (θ 0 )−e
where ND (e)t = t et t is the normalized deviations,
et (θ 0 ) is the calculated ruble exchange rate according to Formula (19),
et is the nominal exchange rate to the US dollar.
Mathematics 2022, 2022,
Mathematics 10, x 10,
FOR PEER REVIEW
4672 10 of 19
10 of 19

during This special procedure

the studied periods. for adjustingstandard
Therefore, the internal coefficients
statistical of the model
indicators, was chosen
including those ap-
to conduct an empirical analysis. This is because a multifactorial nonlinear relationship is
plied in accordance with the Gauss-Markov theorem, are not applicable here. The author
being investigated due to the nature of the exchange rate since it changed several2times
here means such widely known and used regression quality indicators as R -Adjusted,
during the studied periods. Therefore, standard statistical indicators, including those
Student
appliedand Fisher testwith
in accordance statistics, and so forth.
the Gauss-Markov Thus,are
theorem, wenotused the average
applicable of normalized
here. The author
deviations
here means(AND) and the
such widely average
known and of absolute
used normalized
regression deviations
quality indicators as R (AAND)
2 as the
-Adjusted,
model quality indicators:
Student and Fisher test statistics, and so forth. Thus, we used the average of normalized
deviations (AND) and the average of absolute normalized deviations (AAND) as the model
1 N N
quality indicators: AND = (ND(е)t ), AAND = 1 ND(е) t .
 
N t =1 N t =1
N N
They are AND
directly = N1
related ∑ (the
to ( e)t ), AAND
NDparameter = N1 ∑ |procedure.
estimation ND ( e)t |.
t =1 t =1
In particular, similar indicators are the basic quality indicators when building the
hybrid They
model areofdirectly
completerelated to the parameter
ensemble empirical estimation procedure.
mode decomposition (CEEMDAN) based
multilayer long short-term memory (MLSTM) networks that adoptsbuilding
In particular, similar indicators are the basic quality indicators when the
the multilayer
hybrid model of complete ensemble empirical mode decomposition (CEEMDAN) based
stacked architecture to forecast the trend of exchange rate [40].
multilayer long short-term memory (MLSTM) networks that adopts the multilayer stacked
In the period August 1997–March 1999, the official exchange rate of the Central Bank
architecture to forecast the trend of exchange rate [40].
of Russia, based
In the on August
period trading1997–March
on the MICEX1999,(Moscow
the officialInterbank Currency
exchange rate Exchange),
of the Central Bank is the
nominal rate.
of Russia, It ison
based closely
tradingconnected with(Moscow
on the MICEX the interbank market.
Interbank As aExchange),
Currency result of is
numerical
the
simulation using
nominal rate. the
It is MS EXEL
closely tabular
connected withprocessor (version
the interbank 2013)
market. As aatresult
a given coefficient k =
of numerical
5.83 (the official
simulation using ruble
the exchange
MS EXEL rate in August
tabular processor 1997), the value
(version of athe
2013) at parameter
given was es-
coefficient
k = 5.83 𝜃(the
tablished = official
0.27. ruble exchange rate in August 1997), the value of the parameter was
established 0 = 0.27.
Figure 1 θ(author’s calculations, monthly data) shows the dynamics of the official ex-
Figure 1 (author’s calculations, monthly data) shows the dynamics of the official
change rate of the Central Bank of the Russian Federation e(nominal) and the calculated
exchange rate of the Central Bank of the Russian Federation e(nominal) and the calculated
ruble exchange rate 𝑒 (𝜃′) when using the real GDP index as a determinant Q and the
ruble exchange rate et (θ 0 ) when using the real GDP index as a determinant Q and the
average
averageactual
actualexport
exportprice
price index asaadeterminant
index as determinant P*.P*.

Figure
Figure 1. Calculated
1. Calculated and
and nominalUSD/RUR
nominal USD/RURexchange
exchange rates
rates (August
(August 1997–March
1997–March1999,
1999,author’s
author’s cal-
calculations, monthly
culations, monthly data).data).

AND = 14.3% and AAND = −4.3%. Possible deviations can also be explained by
theAND = 14.3%
inaccuracy and AAND(primarily
of calculations = −4.3%. the
Possible
index ofdeviations canprices),
actual export also beintra-monthly
explained by the
inaccuracy of calculations (primarily the index of actual export prices),
fluctuations in the nominal exchange rate, as well as a random component. intra-monthly fluc-
tuations in the
When nominalthe
analyzing exchange
dynamicsrate, as well
in Figure 1, as
twoa random
periods ofcomponent.
the discrepancy between
theWhen analyzing the dynamics in Figure 1, two periods of distinguishable:
nominal settlement and official ruble exchange rates are clearly the discrepancy between
the1.nominal settlement
The first and until
period lasted official ruble1998.
August exchange rates
An excess of are clearly distinguishable:
the calculated over the official
1. Theexchange rate lasted
first period characterizes it. During
until August 1998.this
Anperiod, thethe
excess of ruble exchange
calculated ratethe
over wasofficial
restrained due to the sale by the Central Bank of Russia of a significant part of the gold
exchange rate characterizes it. During this period, the ruble exchange rate was re-
strained due to the sale by the Central Bank of Russia of a significant part of the gold
and foreign exchange reserves, which decreased from $24.5 billion in August 1997 to
$12.5 billion in August 1998, and foreign loans received at that time from interna-
tional monetary organizations. This was a consequence of the policy pursued by the
Mathematics 2022, 10, x FOR PEER REVIEW 11 of 19
Mathematics 2022, 10, 4672 11 of 19

Bank of Russia during this period. It is important here that the Bank of Russia pur-
andaforeign
sued policyexchange reserves,
of controlled which of
floating decreased from
the ruble $24.5 billion
exchange in There
rate. Augustwere
1997 tocertain
$12.5 billion in August 1998, and foreign loans received at that time
restrictions on export-import operations and capital transactions. According to the from international
monetary organizations. This was a consequence of the policy pursued by the Bank
author and a number of other Russian economists, this currency regime was “too
of Russia during this period. It is important here that the Bank of Russia pursued a
much controlled
policy of controlledfloating”.
floatingInof fact, it was
the ruble a quasi-fixed
exchange regime.
rate. There were certain restrictions
2. In ontheexport-import
second period (from August
operations 1998
and capital to March 1999),
transactions. Accordingthe to
opposite picture
the author and ais ob-
served. The excess of the nominal ruble exchange rate over the
number of other Russian economists, this currency regime was “too much controlled calculated rates is
explained
floating”.by In the
fact,actions
it was aof the Minister's
quasi-fixed regime.Cabinet on 17 August 1998, as a result of
2. which
In the second
there wasperiod
a sharp (from August
excess of the1998 to March
capital leakage1999), the over
values opposite picture is me-
the calculated
observed. The excess of the nominal ruble exchange rate over
dium-term values. At the same time, there is a stabilization of the Central Bank’sthe calculated rates re-
is explained by the actions of the Minister’s Cabinet on 17 August
serves, which indicates that the balance of payments is in an equilibrium position in 1998, as a result
of which there was a sharp excess of the capital leakage values over the calculated
the medium term.
medium-term values. At the same time, there is a stabilization of the Central Bank’s
Thus, as a result
reserves, of the analysis,
which indicates that the it is possible
balance to identify
of payments the
is in an main reasons
equilibrium for in
position the fall
in the ruble exchange
the medium term.rate in August 1997–March 1999: rising consumer prices, falling ex-
port prices, falling GDP,
Thus, as a result of the and significant
analysis, capitaltooutflow.
it is possible identify the main reasons for the fall in
theInruble
thisexchange
context, rate
«unclean»
in August controlled
1997–March floating is oneconsumer
1999: rising of the important factors
prices, falling exportfor the
prices, falling
deviation of theGDP, and significant
calculated capitalmarket
results from outflow.data.
In In this
this context,
regard, «unclean»
during controlled
2007–2009, floating
the Bank of is one ofconducted
Russia the important factorsoffor
a regime the
“relatively
deviation of the calculated results from market data.
rigid” controlled floating of the national currency with a revised range of fluctuations.
In this regard, during 2007–2009, the Bank of Russia conducted a regime of “relatively
Compared to the previous period of 1997–98, restrictions on export-import operations and
rigid” controlled floating of the national currency with a revised range of fluctuations.
capital transactions
Compared have been
to the previous significantly
period of 1997–1998, reduced.
restrictions on export-import operations
In the period from December 2007 to
and capital transactions have been significantly reduced.June 2009, the average nominal exchange rate
of the US dollar to the ruble for the period (month)
In the period from December 2007 to June 2009, the average calculated by the
nominal Central
exchange rateBank
of of
Russia
the USis dollar
considered the nominal
to the ruble exchange
for the period (month)rate.calculated
As a resultby of
thenumerical
Central Banksimulation,
of Russia with
is considered
a given the nominal
coefficient k = 24.57exchange rate. As
(the average a result rate
nominal of numerical simulation,
for December with
2007), thea given
parameter
value was established 𝜃’ = −0.63.
coefficient k = 24.57 (the average nominal rate for December 2007), the parameter value was
established θ 0 = −0.63.
In Figure 2 presents the average nominal exchange rate of the US dollar to the ruble
In Figure 2 presents the average nominal exchange rate of the US dollar to the ruble
e(nominal) and the dynamics of the calculated ruble exchange rate depending on the real
e(nominal) and the dynamics of the calculated ruble exchange rate depending on the real
GDP index.
GDP index.

Figure
Figure Calculatedand
2. 2.Calculated and nominal
nominal USD/RUR
USD/RURexchange
exchangerates (December
rates 2007–June
(December 2009, 2009,
2007–June author’s
author’s
calculations, monthly data).
calculations, monthly data).
As a result, AND = 13.5% and AAND = −5.1% for the calculated ruble exchange rate.
AsFirst,
a result, AND
negative = 13.5%
values and
of this AAND =signal
parameter −5.1%that
forthere
the calculated ruble tendencies
were revaluation exchange rate.
of First, negative
the ruble values
exchange rate.of this parameter signal that there were revaluation tendencies
of the ruble exchange rate.
When analyzing the dynamics of the nominal exchange rate of the national currency
in When
Figure analyzing theof
2, two periods dynamics
divergenceof of
the nominal
both exchange
the calculated rate
rates ofthe
and thenominal
nationalruble
currency
in Figure 2, two periods of divergence of both the calculated rates and the nominal ruble
exchange rate are distinguished. However, in contrast to the period of 1997–1999 dis-
cussed above, this has similar factors, but it happens in a different scenario:
Mathematics 2022, 10, 4672 12 of 19

exchange rate are distinguished. However, in contrast to the period of 1997–1999 discussed
above, this has similar factors, but it happens in a different scenario:
1. The first period lasted until July-August 2008. The excess of the nominal rate over the
calculated rates already characterizes it. During this period, the revaluation trends
of the ruble exchange rate were restrained by the replenishment of foreign reserves
by the Central Bank of Russia. It sterilized a significant amount of foreign currency
coming into the country through the export of primary mineral raw materials. This
was, among other things, a consequence of capital inflows due to a significant increase
in the loan debt of the banks and private sector in the short and medium term.
Currency interventions have led to unprecedented growth in the Russian history of
international reserves to 596.5 billion US dollars on 1 August 2008, with a permanent
increase in the index of the ruble real exchange rate to the US dollar and to the European
currency. This is a consequence of the exchange rate policy in this period.
2. The second period covers the time of the crisis processes beginning that are generally
external in nature. However, this has significantly affected the development of the
Russian economy. From September 2008 to June 2009, the public watched the reverse
process: the excess of the calculated rate over the nominal ruble exchange rate. This
happened with a capital drain compensated by the Central Bank of Russia. Only
in the period of September–December 2008 the banking and other private sector
liabilities decreased by 35.1, with an increase in assets by 120.1 billion US dollars due
to significant sales of international reserves.
In the period after February 2009, there was the stabilization of Russia’s international
reserves. This generally speaks about the stabilization of the balance of payments in the
medium term.
As a result of the analysis, we can identify as the main reason for the fall in the ruble
exchange rate in the period September 2008–February 2009. It was a significant drop in
actual export prices (including oil and other energy prices). This happened because of
the global market deterioration with incomparably low (by the standards of the period
1997–1998) growth in consumer prices and a short-term drop in GDP.
Since the end of 2014, the Bank of Russia has been following a floating exchange rate
regime. A floating exchange rate is a necessary condition for the effective implementation
of monetary policy within the framework of the inflation-targeting strategy. The exchange
rate of foreign currency to the ruble is determined by the balance of supply and demand
of a foreign currency in the foreign exchange market (The Main Directions of the Unified
State Monetary Policy, [41]).
During the currency crisis in 2014, the nominal exchange rate of the US dollar to
the Russian ruble at the end of the period (month) calculated by the Bank of Russia
is considered the nominal exchange rate [42]. The price index of the Brent oil mixture
on ICE (Intercontinental Exchange, data from the Bloomberg information terminal) was
the determinant P*. This is due to the predominance of oil in the exports and the close
correlation of other Russian export products with the oil prices. The construction of a
complete index of actual export prices has become extremely difficult due to the lack of
government statistics. The real GDP index was the determinant Q [43].
As a result of numerical modeling, the parameter value was determined θ 0 = 0.45
(Figure 3, author’s calculations).
Mathematics 2022, 10, x FOR PEER REVIEW 13 of 19
Mathematics 2022, 10, 4672 13 of 19

Figure
Figure Calculated and
3. 3.Calculated and nominal
nominal USD/RUR exchange
USD/RUR rates rates
exchange (December 2013–February
(December 2015, author’s
2013–February 2015, au-
calculations,
thor’s monthly
calculations, data). data).
monthly
AND = 0.28% and AAND = 2.98%. This indicates the high quality of the model (19).
ANDAs a=result
0.28%ofand AAND =conducted
the analysis 2.98%. This indicates
during the high
this period, quality of
it is possible the model
to single out as(19).
theAs a result
main reasonoffor
thetheanalysis conducted
fall of the duringthe
US dollar against this period,
ruble it is drop
a twofold possible to single
in export pricesout as
theofmain reason for the fall of the US dollar against the ruble a twofold
oil and other energy carriers on international markets. This is due to the overwhelming drop in export
prices of oil andofother
predominance mineralenergy carriersinon
raw materials theinternational
index of averagemarkets. This isprices.
actual export due to the over-
During
this period,
whelming the growth of
predominance of consumer
mineral raw prices within the
materials country
in the indexalso had a significant
of average actual export
unidirectional
prices. During thisimpact on the
period, result.
the growth of consumer prices within the country also had a
The media also cited
significant unidirectional impact the fall
oninthe
oilresult.
prices on international markets as one of the
causes of the 2014–2015 currency crisis. However, this is an attribute of other periods
The media also cited the fall in oil prices on international markets as one of the causes
under consideration.
of the 2014–2015 currency
It is important to notecrisis. However,
here that in the lastthis is an
period in attribute
2013–2015 of other
when theperiods under con-
Bank of Russia
sideration.
completely switched to the floating exchange rate policy, the simulation results correlated
It isbetter
much important to notedata
with market herecompared
that in the last period
to previous in 2013–2015 when the Bank of Rus-
periods.
sia completely switched to the floating exchange rate policy, the simulation results corre-
5. Modeling
lated much better of Short-Term
with market Effects
dataofcompared
Exchange to Rate Dynamics
previous periods.
We assume that the medium-term dependencies (10) and (12) will retain their struc-
ture in
5. Modeling the short-term
of Short-Term mathematical modeling
Effects of ExchangedueRate
to certain economic inertia of current
Dynamics
balance operations.
WeInassume thatitthe
this context, medium-term
is necessary dependencies
to modify the functional(10) and (12) will
dependencies retainoutflow
of capital their struc-
ture
and inflow to model the short-term dynamics of the exchange rate. In this case,ofthe
in the short-term mathematical modeling due to certain economic inertia current
balance operations.
coefficients k cease to be constants. We need to introduce a function
In (this
k K− )context,
t = k K − (it
t)is necessary
, for example,towhich
modify the functional
increases over timedependencies
for the capitalofoutflow
capital out-
dependence during the economic and financial crises.
flow and inflow to model the short-term dynamics of the exchange rate. In this case, the
Consequently,
coefficients k cease tothebefunctional
constants.dependence
We need to of introduce
capital outflow has the form:
a function
( k K − ) t = k K − (t ) , for
−
example, which 1 increases
∗ x+ x
∗ x+
over
ρ
R
time for
y the capital outflow de-
Kt = k K− (t) Pt ( Qt1 Q t −1
1 ) (e ) (20)
pendence during the economic and financial crises. t−1
Consequently, the functional dependence of capital outflow has the form:
In the short term, during the economic and 1financial x crisis in the foreign exchange
− ∗ x +1 ∗ x +1 ρ R y
K t =increase
market, there will be a significant k K − (t ) Pin
t (Qt
the rate Qof
t −1 ) (eoutflow.
capital t −1 )
This guarantees a (20)
strict increment in (20) of the function k k− (t) by t.
The functional dependence of capital inflow is determined symmetrically:
In the short term, during the economic and financial crisis in the foreign exchange
market, there will be a significant increase1 in the xrate θ of capitalz outflow. This guarantees
Kt + = k K+ (t) Pt∗ ( Qt x+1 Qt−1 x+1 ) (e R ) (21)
a strict increment in (20) of the function 𝑘 (𝑡) by t. t−1
The functional dependence of capital inflow is determined symmetrically:
In the short term, with a sharp reduction in capital 1 x
inflows in Formula (21), the function
k k+ (t) by t is dynamically strictly kK + (t ) Pt ∗ (Qt x +1Qt −1 x +1 )θ (etR−1 ) z
Kt + =decreasing. (21)

In the short term, with a sharp reduction in capital inflows in Formula (21), the func-
tion 𝑘 (𝑡) by t is dynamically strictly decreasing.
Mathematics 2022, 10, 4672 14 of 19

The modeling methodology guarantees the interconnectedness of functional dependencies:

1 x ρ y
Kt − = Kt ∗+ = k K− (t) Pt ( Qt ∗ x+1 Qt−1 ∗ x+1 ) (e R ) . (22)
t−1

Substitute Functions (20) and (21) in (3). Term (18) will change in the short term and
will receive additional dynamic features:

1 x λ−ρ
( k I ( Q t ∗ x +1 Q t −1 ∗ x +1 ) + k K− (t))
δ−θ
= (k(t)) x+1 (23)
1 x
(k E ( Qt x +1 Q t −1 x +1 ) + k K+ (t))

Omitting the intermediate calculations by analogy, we rewrite (17) in the form:

1 x ρ
Pt ( Qt ∗ x+1 Qt−1 ∗ x+1 ) (k(t)) x+1
et = (24)
1 x θ Pt∗−1 x
Pt∗ k E ( Qt x+1 Qt−1 x+1 ) (e Pt−1 )
t−1

After a temporary separation of the variables, we get:

Pt ∗ x+ρ 1 − θ
et = k ( t ) Qt Q t x +1 .
Pt∗

After re-designation:

P ( t ) ∗ ∗ ρ0 0
e(t, Q(t), Q∗ (t), P(t), P∗ (t)) = et =k(t) Q (t ) Q (t )−θ . (25)
P∗ (t)

The function k(t) in (20) and (21) in the short term is responsible for explosive changes
in the exchange rate in this multifactorial nonlinear dependence.
x 1
The term ( Qt−1 x+1 Qt x+1 ), in comparison with the other components in the formulas,
is quite stable. At the same time, the strict increase in the function k k− (t) in Formula (20)
and the strict decrease in the function k k+ (t) in Formula (21) dynamically in a short-term
crisis period guarantee a strict increase of the function k(t) in (25).
The conducted modeling allows us to evaluate the contribution of the function k(t). In
certain periods, it can be quite significant. Consider the crisis period of 2014–2015. In accor-
dance with the calculations based on (19) and Figure 3 of the previous paragraph, the aver-
age equilibrium exchange rate for November–December 2014 was 56.79 USD/RUR. This
directly corresponds to the officially published rate of the Bank of Russia, 56.26 USD/RUR
in December, which is also calculated as the average rate for the period. Figure 4 shows the
actual TODAY quotes (USDRUB_TOD, according to the FINAM News Agency [44]). The
market maximum was 80.2 USD/RUR in December 2014, which allows us to estimate the
short-term contribution of the function k(t) to the crisis depreciation dynamics (the stars in
Figure 4 indicate the levels of exchange rates):
eDecember (market maximum )−eDecember ( calculated equilibrium )
eDecember ( calculated equilibrium )
=
−56.79 = 41.22%.
= 80.256.79
Mathematics 2022,
Mathematics 10,10,
2022, x FOR
4672PEER REVIEW 1515 of 19
of 19

41.22%

Figure
Figure4.4.Actual
Actual TODAY quotesUSD/RUR
TODAY quotes USD/RUR (USDRUB_TOD,
(USDRUB_TOD, Japanese
Japanese Candlesticks,
Candlesticks, MarchMarch 2014–
2014–July
July
2015, FINAM News Agency, monthly data [44]) and evaluating the short-term contribution of the of
2015, FINAM News Agency, monthly data [44]) and evaluating the short-term contribution
the function k(𝑡) in December 2014. The Russian words in the picture from left to right are: March,
function k(t) in December 2014. The Russian words in the picture from left to right are: March, May,
May, July, Sept., Nov., Dec., Jan., March, May, July. The Russian unit is hundred million.
July, Sept., Nov., Dec., Jan., March, May, July. The Russian unit is hundred million.

This
Thisnegative
negativeeffect
effectwas
wasobtained,
obtained,among
amongother
otherthings,
things,due
duetotothe
theloss
lossofofthe
themanage-
man-
ment levers
agement of theofforeign
levers exchange
the foreign exchangemarket by the
market Bank
by the of Russia.
Bank TheThe
of Russia. possibility
possibilityof such
of
situations shouldshould
such situations lead to lead
closer
toattention to the Russian
closer attention ruble dynamics
to the Russian from thefrom
ruble dynamics monetary
the
authorities.
monetary authorities.
Theimpact
The impactof ofthe
the function k(t) on
function k(𝑡) on other
otherconsidered
consideredperiods
periodscould
could not
notbebeestimated
estimated
duetotothe
due thelack
lackof
ofdata.
data.

6. Mathematical Exchange Rate Modeling: Long-Term Dynamics

6. Mathematical Exchange Rate Modeling: Long-Term Dynamics
For the purposes of this study, it is necessary to make the following assumption: in
For the purposes of this study, it is necessary to make the following assumption: in
the functional dependence (10), the coefficient k E ceases to be a constant in the long term. It
the functional
becomes dependence
a dynamic function(10),
k E,l (the coefficient
t). This k E in
is important ceases to be
the long a constant
term in the long
for modeling:
term. It becomes a dynamic function k E , l ( t ) . This isδ important in the long term for mod-
1 x z
eling: Et = k E,l (t) Pt∗ ( Qt x+1 Qt−1 x+1 ) (e R ) (26)
t−1
1 x
E t = k E ,l (t ) Pt ∗ (Q t x +1 Q t −1 x +1 ) δ ( e tR−1 ) z (26)
Let us discuss the dynamic properties of the function k E,l (t). The increasing or de-
creasing type of function is very important. For example, for export-oriented commodity-
Let us discuss
producing therestructuring
countries, dynamic properties
towards of the function
intermediate k E ,l ( tmay
products ) . The increasing
become a key. or
Including type
decreasing the Russian version,
of function world
is very practice shows
important. that the for
For example, dynamics of prices for
export-oriented inter-
commod-
mediate products
ity-producing outstrip
countries, the prices of towards
restructuring primary intermediate
raw materials.products may become a key.
In thethe
Including context of mathematical
Russian version, worldmodeling,
practicethisshows
leads to an the
that increase in currency
dynamics flowsfor
of prices in the
inter-
long term compared to the short term. The increased
mediate products outstrip the prices of primary raw materials. share of services in the export structure
mayInalso
theaffect thisof
context direction. In this case,
mathematical the function
modeling, k E,l (t)tostrictly
this leads increases
an increase in by t.
currency flows
In this optimistic scenario, an improvement in the country’s investment climate can
in the long term compared to the short term. The increased share of services in the export
be expected in the long term. This will lead to a significant increase in capital inflows due
structure may also affect this direction. In this case, the function k E ,l ( t ) strictly in-
creases by t.
In this optimistic scenario, an improvement in the country’s investment climate can
be expected in the long term. This will lead to a significant increase in capital inflows due
to an increase in the portfolio and direct investments. In this case, the function kK + ,l (t ) in
Formula (27) also increases strictly by t:
Mathematics 2022, 10, 4672 16 of 19

to an increase in the portfolio and direct investments. In this case, the function k K+ ,l (t) in
Formula (27) also increases strictly by t:

1 x θ z
Kt + = k K+ ,l (t) Pt∗ ( Qt x+1 Qt−1 x+1 ) (e R ) (27)
t−1

Similarly earlier, we substitute dependencies (26) and (27) in (3):

1 x

y λ 1 x ρ
y
k I Pt ( Qt ∗ x+1 Qt−1 ∗ x+1 )
etR−1 + k Pt ( Qt ∗ x+1 Qt−1 ∗ x+1 ) etR−1
et = δ θ
(28)
1 x
z 1 x
z
k E,l (t) Pt ∗ ( Qt x+1 Qt−1 x+1 ) etR−1 + k K+ ,l (t) Pt ∗ ( Qt x+1 Qt−1 x+1 ) etR−1

Define the function K(t):

1 x λ−ρ
( k I ( Q t ∗ x +1 Q t −1 ∗ x +1 ) + kK− )
δ−θ
= K ( t ) x +1 (29)
1 x
(k E,l (t)( Qt x +1 Q t −1 x +1 ) + k K+ ,l (t))

Regroup in this case (11):

  !x
Pt ρ P ρ
x
K ( t ) ∗ Q t ∗ x +1 Q t − x +1 K (t) t∗−1 Qt−1 ∗ x+1 Qt−1 − x+1
θ θ
et ( e ) =
t−1 Pt Pt−1

Similarly earlier, we carry out a temporary separation of the variables and project the
model to a multi-period case:

P∗ (t) ρ
e(t, Q(t), Q∗ (t), P(t), P∗ (t)) =K (t) P∗ (t) Q∗ (t) x+1 Q(t)− x+1 =
θ

0 0 (30)
= K (t) PP∗((tt)) Q∗ (t)ρ Q∗ (t)−θ .

In Formula (29), we will assume: the additional capital inflow that occurs with GDP
growth correlates primarily with the growth of goods and services exports. There is
1 x
sufficient stability of the member Qt x+1 Qt−1 x+1 in comparison with other financial and
economic indicators. As a result, a strict increase in the internal functions k E,l (t) and k K+ ,l (t)
in this case, guarantee a strict decrease of the introduced function K(t) in the Formula (30)
by t.
One consequence deserves attention. Regroup in the Formula (30) and express the real
exchange rate:
∗ (t)
,
P 0 0
e R (t) = e(t) = K (t ) Q∗ (t )ρ Q∗ (t )−θ . (31)
P(t)
The dynamic behavior of the function K(t) in (31) guarantees the strengthening of both the
nominal and the real exchange rates in the long term compared to the medium-term equilibrium.

7. Conclusions, Discussion, and Results

The paper presents mathematical exchange rate modeling of two interconnected equal
economies in the free-floating currency regime. Modeling is based on the further develop-
ment of the author’s concept of International Flows Equilibrium Exchange Rate modeling
(IFEER-modeling). This approach allows us to study the dynamics of the exchange rate of
medium-term equilibrium and short- and long-term disequilibrium relatively. Developed
discrete and integral variants are the core of the concept in this work.
The IFEER concept makes it possible to include the movement of capital as a determi-
nant of the global economy in the structural mathematical modeling of the exchange rate.
The internal functional dependencies of export-import operations and capital movements
Mathematics 2022, 10, 4672 17 of 19

in the system of the main exchange rate determinants are mathematically determined
and formalized.
The newly constructed structural models of the medium-, short- and long-term ex-
change rate dynamics and the new final structural dependencies of the exchange rate, based
on the system of fundamental macroeconomic factors, are the main result of the work. This
system includes aggregates of export-import operations and capital flows, competitive
advantage index, consumer price index, actual export price index, real gross domestic
product index, elasticity coefficients of foreign trade operations, intertemporal solutions of
micro agents, etc.
The conducted modeling allowed the revealing of the structural pricing mechanism of
the exchange rate dynamics from new positions.
A distinctive feature of the models is the emphasis on the mechanism of pricing
formation in the consumer’s currency. This is typical for the pricing mechanism of Russian
export products, based on prices in US dollars of the main world commodity exchanges.
Empirical studies of the exchange rate of the US dollar to the Russian ruble (USD/RUR),
based on a systematic analysis of the exchange rate policy, are carried out during the finan-
cial and economic crises in recent Russian history.
Because of the conducted analysis in these periods, it is possible to single out the fall
in export prices of oil and other energy products on international markets as the main
reason for the fall in the Russian ruble exchange rate. This is due to the overwhelming
predominance of mineral raw materials in the index of average actual export prices and
the deterioration of the global market situation. At the same time, the growth of consumer
prices within the country also had a significant impact on the results of the dynamics of the
USD/RUR exchange rate. The impact of the fall in aggregate output in certain periods was
also noticeable.
At the same time, in the last period, when the Bank of Russia completely switched to
the floating exchange rate policy, the simulation results correlated much better with market
data compared to previous periods.
The conducted modeling allows us to evaluate the short-term contribution to the crisis
depreciation dynamics of the Russian ruble quantitatively.
The identification of the structural dependence of the exchange rate on its main factors
makes it possible to simplify the development of sound management decisions on the
exchange rate regulation in the system of macroeconomic management.
The modeling also allowed us to draw mathematical conclusions about the nominal
and the real exchange rate dynamics in the long term under certain conditions. How-
ever, the economic interpretation of the long-term modeling results requires the further
accumulation of the state statistics and may become a future study.

Funding: This research received no external funding.

Data Availability Statement: Data available in a publicly accessible repository that does not issue DOIs.
Publicly available datasets were analyzed in this study. This data can be found here: [37–39,41–44].
Conflicts of Interest: The author declares no conflict of interest.

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