ALEXANDRA BOZHECHKOVA: “THE BIG MAC INDEX SUGGESTS THAT THE RUBLE IS UNDERVALUED”

According to Izvestia, the Big Mac Index shows the Russian ruble to be in 2^nd place among the most undervalued currencies in the world, behind only of the Lebanese pound. Alexandra Bozhechkova, head of the Gaidar Institute’s Monetary Policy Department, explains why the gap between the ruble’s nominal exchange rate and the Big Mac Index is so great.

Alexandra Bozhechkova identifies several reasons.

“Firstly, the Index underrepresents non-tradable goods. An adjustment of the Big Mac Index for the increase in prices for the non-tradable goods that are not included in the Index would reduce the undervaluation of the Russian currency. Secondly, the excessive undervaluation of the ruble has to do with an underestimated Balassa-Samuelson effect. Thirdly, the ruble is undervalued due to the effects of the geopolitical factor, for which the PPP concept and the Law of One Price give no consideration, but which makes the actual forex rate deviate significantly from the parity rates. Fourthly, in a number of empirical studies, the fact of a systematic shift in the index has been noted. The difference between the modified Big Mac Index and its initial value can be as large as 60 percentage points for some countries. For Russia, the ruble undervaluation against the US dollar according to the modified Big Mac Index is reduced on average by 45-50 percentage points,” the Gaidar Institute expert believes.