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https://doi.org/10.18288/1994-5124-2022-3-44-73

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Monetary Policy for a Resource-Rich Economy and the Zero Lower Bound

[journal article]

Andreyev, Mikhail
Polbin, Andrey

Abstract

The paper studies monetary policy (MP) under a zero lower bound (ZLB) on the basis of a DSGE model. The economy is open and highly dependent on the terms of trade (TOT). Dynamics are driven by a TOT shock and an external interest rate shock. The change in the transmission of these external shocks... view more

The paper studies monetary policy (MP) under a zero lower bound (ZLB) on the basis of a DSGE model. The economy is open and highly dependent on the terms of trade (TOT). Dynamics are driven by a TOT shock and an external interest rate shock. The change in the transmission of these external shocks in the presence of ZLB is analyzed. Unlike developed economies, for resource-rich countries the ZLB problem becomes relevant during economic expansion when external economic conditions improve. Positive external shocks lead to strengthening of the national currency, a decrease in inflation and a decrease in interest rate under inflation targeting MP. The paper shows that, with an inflation target of 4% and no persistence in interest rates, a positive TOT shock of 1 standard deviation is sufficient to drive the economy into a ZLB. At the same time, if the economy faces ZLB, the impact of the shocks is reduced, since there is an increase in real interest rates, which restrains an increase in household consumption and, accordingly, aggregate demand. Optimal MP rules under the ZLB are analyzed. When conducting MP, it turns out to be optimal to maintain high inertia in interest rates and be less responsive to changes in inflation, which minimizes the likelihood of binding ZLB. Contrary to optimal MP rules, the current MP of the Bank of Russia, along with the inflation target of 4%, excludes the possibility of reaching the ZLB, but is far from the optimal degree of response to changes in inflation. It is also found that, under the current MP, the likelihood of reaching the effective lower bound (ELB) is quite significant.... view less

Keywords
Russia; monetary policy; central bank; interest rate; economic growth

Classification
Economic Policy

Free Keywords
DSGE models; nonlinear models; optimal policy; terms of trade

Document language
English

Publication Year
2022

Page/Pages
p. 44-73

Journal
Ekonomicheskaya Politika / Economic Policy, 17 (2022) 3

ISSN
2411-2658

Status
Published Version; reviewed

Licence
Creative Commons - Attribution-Noncommercial-No Derivative Works 4.0


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© 2007 - 2025 Social Science Open Access Repository (SSOAR).
Based on DSpace, Copyright (c) 2002-2022, DuraSpace. All rights reserved.