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Revealed Preferences of the Bank of Russia. Simulation Approach

  • Karev, M.

    (HSE, Moscow, Russia)

Registered author(s):

    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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    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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    1. Clarida, R. & Gali, J. & Gertler, M., 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Working Papers 99-13, C.V. Starr Center for Applied Economics, New York University.
    2. Ball, Laurence, 1995. "Time-consistent policy and persistent changes in inflation," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 329-350, November.
    3. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
    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. Kirill Sosunov & Oleg Zamulin, 2007. "Monetary Policy in an Economy Sick with Dutch Disease," Working Papers w0101, Center for Economic and Financial Research (CEFIR).
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