Shock-Dependent Exchange Rate Pass-Through in Russia

In this note, we study shock-dependent exchange rate pass-through (ERPT) to consumer prices in Russia. First, we estimate a traditional "shock-independent" ERPT on aggregate quarterly time series of the exchange rate, CPI, and control variables. Estimated coefficients confirm previous studies and official statements by the Bank of Russia. Rolling regression in different periods shows that the ERPT becomes more stable and more precisely estimated after 2014-2015 when the Bank of Russia switched to inflation targeting. We compare results with the ERPT from an estimated structural model. We obtain a forecast of macroeconomic time series from a DSGE model conditional on foreign variables observed. We run the same regression on forecasted data and obtain estimates of the "shock-independent" ERPT from the structural model. We compute shock-dependent ERPT from model impulse responses. The magnitude of the ERPT varies for different shocks with the highest value attributed to domestic monetary policy shocks. When estimating the pass-through of the exchange rate to prices, care must be taken of which shock caused changes in the exchange rate. Since monetary policy shocks appear to be associated with the highest ERPT, and the ERPT becomes more stable after 2014-2015, the Russian economy may be reaping an additional benefit of inflation targeting in the form of reduced monetary policy shocks and a more stable ERPT.