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

Andrej Drygalla

No 14/2017, IWH Discussion Papers from Halle Institute for Economic Research (IWH)

Abstract: Russian monetary policy has been challenged by large and continuous private capital outflows and a sharp drop in oil prices during 2014, with both ongoings having put a significant depreciation pressure on the ruble and having led the central bank to eventually give up its exchange rate management strategy. Against this background, this paper 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, output and the exchange rate. Simulations of the model for the estimated actual strategy and five alternative regimes suggest that the vulnerability of the Russian economy to external shocks can substantially be lowered by adopting some form of an inflation targeting strategy. Foreign exchange intervention-based policy strategies to target the nominal exchange rate or the ruble price of oil, on the other hand, prove inferior to the policy in place.

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: 2017
New Economics Papers: this item is included in nep-cis, nep-mac, nep-mon, nep-opm and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Monetary policy in an oil-dependent economy in the presence of multiple shocks (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:iwhdps:142017

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