Open AccessCentral bank policy under significant balance-of-payment shocks and structural shifts
Author(s) -
Andrey Sinyakov,
Ksenia Yudaeva
Publication year - 2016
Publication title -
russian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.614
H-Index - 12
eISSN - 2618-7213
pISSN - 2405-4739
DOI - 10.1016/j.ruje.2016.09.001
Subject(s) - monetary policy , economics , monetary economics , exchange rate , market liquidity , balance of payments , shock (circulatory) , inflation (cosmology) , financial accelerator , inflation targeting , policy mix , balance sheet , small open economy , dynamic stochastic general equilibrium , macroeconomics , finance , physics , medicine , theoretical physics
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
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