Taylor rule in Russia in the period of infl ation targeting

Abstract

Since 2014, the Bank of Russia has switched to a floating exchange rate and inflation targeting. From that moment the key interest rate, that is, the interest rate of the interbank market, became the main instrument of monetary policy in Russia. At the same time, the question arises: does the policy of the Bank of Russia really contribute to stabilizing inflation? In other words, it is important for policy makers, as well as private economic agents, to understand whether the rate changes sufficiently to stabilize the deviation of inflation from the target. Thus, the task is reduced to the study of the monetary policy rule: the Taylor rule in Russia during the period of inflation targeting. Estimates of the Taylor rule allow us to see the nature of both the systematic reaction of the regulator and the discretionary one. Thus, the task of the study is to consider the systematic and discretionary reaction of the Bank of Russia in response to the deviation of inflation from the target and the output gap based on the Taylor rule. The work is also motivated by the fact that, based on the results of recent research, the basic least squares method can be used to solve the problem. So, to analyze the systematic reaction of the regulator, we evaluate the standard formulation of the Taylor rule using OLS. To analyze the role of the discretionary component, we consider monetary policy shocks as innovations of the Taylor rule. Using the local projection methodology, we estimate the impulse responses of the inflation components of consumer and industrial goods to identified monetary shocks based on the Taylor rule. The results of the assessment indicate the implementation of the Taylor rule in Russia during the period of inflation targeting. The findings indicate an active stabilizing systematic reaction of the regulator in response to the deviation of inflation from the target. Estimates of impulse responses show a decrease in the inflation components of consumer and industrial goods in response to the restraining shock of monetary policy.

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