Central bank policy under significant balance-of-payment shocks and structural shifts

Andrey Sinyakov and Ksenia Yudaeva

Russian Journal of Economics, 2016, vol. 2, issue 3, 246-278

Abstract: In this paper, we analyze a number of monetary and FX policy alternatives using the model of a small open oil-exporting economy hit by severe balance-of-payment shocks, such as those that simultaneously affected the Russian economy in 2014–2015. For our purposes, we modify Romer's (2013) IS-MP general equilibrium model by adding a structure similar to the Russian economy (tradables and oil vs. non-tradables). In the model, we consider an optimal policy mix that includes a floating exchange rate, FX liquidity provision by a central bank and temporary tightening of monetary policy. The flexible exchange rate works as a shock absorber, helping restore aggregate demand and domestic production. If inflation expectations are not anchored, contractionary monetary policy helps to stabilize them. Financial stability risks are addressed by lending FX liquidity to the banking sector.

Keywords: monetary policy; terms-of-trade shock; Russian economy; IS-MP model (search for similar items in EconPapers)
JEL-codes: E12 E41 E52 E58 E63 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:rujoec:v:2:y:2016:i:3:p:246-278

DOI: 10.1016/j.ruje.2016.09.001

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