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The Role of Oil Prices, the Real Effective Exchange Rate, and Inflation in Economic Activity of Russia: An Empirical Investigation

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  • Asset Izatov

    (University of Exeter)

Abstract

In this study we employ empirical analysis to observe the impact of changes in the inflation rate, real exchange rate instability, and oil price fluctuations on the level of real economic activity of Russia. A Vector Autoregressive (VAR) Model was represented and estimated along with Vector Error Correction Model (VECM). There was revealed the existence of long-run cointegration between economic activity, the real effective exchange rate and oil prices over the 01/1995-03/2015 period. In addition, the effect of these factors on the economic output is positive. However, cointegration with inflation was not present in the long-run over the sample period. While in the short-run only the real effective exchange rate had an effect on the economy of Russia. The important feature of this research is that there was revealed an automatic adjustment mechanism in the model, which helps the economy of Russia to reach its equilibrium after the shock. The paper insists on implementation of the relevant reforms to the fiscal policy to diversify and strengthen the economy.

Suggested Citation

  • Asset Izatov, 2015. "The Role of Oil Prices, the Real Effective Exchange Rate, and Inflation in Economic Activity of Russia: An Empirical Investigation," Eastern European Business and Economics Journal, Eastern European Business and Economics Studies Centre, vol. 1(3), pages 48-70.
    • Handle: RePEc:eeb:articl:v:1:y:2015:i:3:p:48-70
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