Revealed Preferences of the Bank of Russia. Simulation Approach

M. Karev
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M. Karev: HSE, Moscow, Russia

Journal of the New Economic Association, 2011, issue 9, 72-97

Abstract: The paper aims at reconstructing the regulator’s loss function both qualitatively and quantitatively. The main idea is to deduct from the observed behavior of the monetary policy instrument the underlying preferences that explain such behavior. In order to obtain quantitative results we use the simulation model of the Russian economy. The method consists in embeding in this model the Central Bank’s preferences modeled by different types of loss functions and choose the one that does the job best, i.e. one for which the implied preference parameter behaves most smoothly. One of the main findings is that the Bank of Russia acts as if it had two conflicting targets: inflation stabilization and low real exchange rate, or, alternatively, high foreign reserve growth. It is shown that the revealed preferences together with the simulation model can be used for forecasting the medium run dynamics of inflation and nominal exchange rate. It is also shown that commonly used quadratic loss function that models inflation and real sector stabilization is not relevant in depicting the Bank’s behavior.

Keywords: monetary policy; inflation; real exchange rate; simulation mode (search for similar items in EconPapers)
JEL-codes: E31 E37 E52 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:nea:journl:y:2011:i:9:p:72-97

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