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Modeling real exchange rate of the Russian ruble using Markov regime switching approach


  • Polbin, Andrey

    () (RANEPA, Gaidar Institute, Moscow, Russian Federation)

  • Shumilov, Andrei

    () (RANEPA, Moscow, Russian Federation)

  • Bedin, Andrei

    () (RANEPA, MIPT, Moscow, Russian Federation)

  • Kulikov, Alexander

    () (RANEPA, MIPT, Moscow, Russian Federation)


The paper analyzes the relationship between the real Russian ruble exchange rate and real oil prices using the error correction model with Markov regime switching, which allows for changes in exchange rate policy. It is found that during the period 1999–2018 real exchange rate dynamics was characterized by two clearly distinguishable regimes, one with fast and the other with slow adjustment to long-term equilibrium in response to oil price shocks. Further model testing shows that long-term relationship between real exchange rate and oil price is invariant to regime change. It is also found that, despite adoption of a floating exchange rate policy in 2014, inflexible real exchange rate regime has been periodically identified in recent years. This could be due to the new budget rule, according to which Russian Ministry of Finance in February 2017 started purchasing foreign currencies in amount of excess oil and gas earnings of the federal budget.

Suggested Citation

  • Polbin, Andrey & Shumilov, Andrei & Bedin, Andrei & Kulikov, Alexander, 2019. "Modeling real exchange rate of the Russian ruble using Markov regime switching approach," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 55, pages 32-50.
  • Handle: RePEc:ris:apltrx:0373

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    More about this item


    real effective exchange rate; Russia; oil prices; Markov regime switching model; error correction model;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics


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