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Revealed Preferences of the Bank of Russia. Simulation Approach

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  • Karev, M.

    (HSE, Moscow, Russia)

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    Abstract

    The paper aims at reconstructing the regulator’s loss function both qualitatively and quantitatively. The main idea is to deduct from the observed behavior of the monetary policy instrument the underlying preferences that explain such behavior. In order to obtain quantitative results we use the simulation model of the Russian economy. The method consists in embeding in this model the Central Bank’s preferences modeled by different types of loss functions and choose the one that does the job best, i.e. one for which the implied preference parameter behaves most smoothly. One of the main findings is that the Bank of Russia acts as if it had two conflicting targets: inflation stabilization and low real exchange rate, or, alternatively, high foreign reserve growth. It is shown that the revealed preferences together with the simulation model can be used for forecasting the medium run dynamics of inflation and nominal exchange rate. It is also shown that commonly used quadratic loss function that models inflation and real sector stabilization is not relevant in depicting the Bank’s behavior.

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    File URL: http://www.econorus.org/repec/journl/2011-9-72-97r.pdf
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    Bibliographic Info

    Article provided by New Economic Association in its journal Journal of the New Economic Association.

    Volume (Year): (2011)
    Issue (Month): 9 ()
    Pages: 72-97

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    Handle: RePEc:nea:journl:y:2011:i:9:p:72-97

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    Related research

    Keywords: monetary policy; inflation; real exchange rate; simulation mode;

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    1. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
    2. Laurence M. Ball, 1990. "Time-Consistent Policy and Persistent Changes in Inflation," NBER Working Papers 3529, National Bureau of Economic Research, Inc.
    3. Kirill Sosunov & Oleg Zamulin, 2007. "Monetary Policy in an Economy Sick with Dutch Disease," Working Papers w0101, Center for Economic and Financial Research (CEFIR).
    4. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    5. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
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