Exchange Rate in a Resource-Based Economy in the Short-Term: The Case of Russia

What should be the appropriate macroeconomic policy to minimize the volatility of output in a resource-based economy, i.e., in an economy that is highly dependent on export of resources with very volatile world prices? This paper examines the sources of volatility of output in Russia as compared to other countries and concludes that in 1994-2004 volatility of Russian growth rates was mostly associated with internal monetary shocks, rather than with external Terms of Trade (TT) shocks. In all countries that export resources with highly volatile prices, like Russia, volatility of economic growth is associated with volatility of Real Exchange Rate (RER), which in turn is mostly caused by the inability to accumulate enough foreign exchange (FOREX) reserves in central bank accounts and in Stabilization Funds (SF). However, in Russia, volatility of RER and GDP growth rates in recent 10 years was associated not so much with objective circumstances (TT-shocks), but with poor macroeconomic policies. Despite intuition, volatility of RER was caused mostly by internal monetary shocks rather than by external TT shocks. It is argued that the good (minimizing volatility) macroeconomic policy for Russia would be: (1) Not to generate monetary shocks; and (2) To cope with inevitable external shocks via changes in FOREX and SF, while keeping the RER stable.