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Central bank policy under significant balance-of-payment shocks and structural shifts
[journal article]
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 gener... view more
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.... view less
Keywords
monetary policy; Russia
Classification
Economic Policy
Free Keywords
terms-of-trade shock; Russian economy; IS-MP model
Document language
English
Publication Year
2016
Page/Pages
p. 246-278
Journal
Russian Journal of Economics, 2 (2016) 3
ISSN
2618-7213
Status
Published Version; reviewed
Licence
Creative Commons - Attribution-Noncommercial-No Derivative Works 4.0