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Revealed Preferences of the Bank of Russia. Simulation Approach

Author

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  • Karev, M.

    (HSE, Moscow, Russia)

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.

Suggested Citation

  • Karev, M., 2011. "Revealed Preferences of the Bank of Russia. Simulation Approach," Journal of the New Economic Association, New Economic Association, issue 9, pages 72-97.
    • Handle: RePEc:nea:journl:y:2011:i:9:p:72-97
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    References listed on IDEAS

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    More about this item

    Keywords

    monetary policy; inflation; real exchange rate; simulation mode;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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