Monetary policy in an oil-dependent economy in the presence of multiple shocks

Andrej Drygalla

Review of World Economics (Weltwirtschaftliches Archiv), 2023, vol. 159, issue 1, No 6, 185-214

Abstract: Abstract Russian monetary policy has been challenged by large and continuous private capital outflows and a sharp drop in oil prices during 2014. Both contributed to significant depreciation pressures on the ruble and led the central bank to give up its exchange rate management strategy. Against this background, this work estimates a small open economy model for Russia, featuring an oil price sector and extended by a specification of the foreign exchange market to correctly account for systematic central bank interventions. We find that shocks to the oil price and private capital flows substantially affect domestic variables such as inflation and output. Simulations for the estimated actual strategy and alternative regimes suggest that the vulnerability of the Russian economy to external shocks can substantially be lowered by adopting some form of inflation targeting. Strategies to target the nominal exchange rate or the ruble price of oil prove to be inferior.

Keywords: Monetary policy; Exchange rate interventions; Oil price; Capital flows (search for similar items in EconPapers)
JEL-codes: E52 F31 F41 G15 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s10290-022-00466-1

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