Modeling real exchange rate of the Russian ruble using Markov regime switching approach

Andrey Polbin, Andrei Shumilov, Andrei Bedin () and Alexander Kulikov ()
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Andrei Bedin: RANEPA, MIPT, Moscow, Russian Federation
Alexander Kulikov: RANEPA, MIPT, Moscow, Russian Federation
Authors registered in the RePEc Author Service: Alexander Kulkov ()

Applied Econometrics, 2019, vol. 55, 32-50

Abstract: The paper analyzes the relationship between the real Russian ruble exchange rate and real oil prices using the error correction model with Markov regime switching, which allows for changes in exchange rate policy. It is found that during the period 1999–2018 real exchange rate dynamics was characterized by two clearly distinguishable regimes, one with fast and the other with slow adjustment to long-term equilibrium in response to oil price shocks. Further model testing shows that long-term relationship between real exchange rate and oil price is invariant to regime change. It is also found that, despite adoption of a floating exchange rate policy in 2014, inflexible real exchange rate regime has been periodically identified in recent years. This could be due to the new budget rule, according to which Russian Ministry of Finance in February 2017 started purchasing foreign currencies in amount of excess oil and gas earnings of the federal budget.

Keywords: real effective exchange rate; Russia; oil prices; Markov regime switching model; error correction model (search for similar items in EconPapers)
JEL-codes: C22 C51 E52 F31 F41 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:apltrx:0373

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