Sterilized Intervention in an Inflation Targeting Regime: the Case of Russia

In November 2014 the Central Bank of Russia conducted the transition to the inflation targeting regime. Then, in order to maintain the necessary liquidity in the financial market and to ensure the stability of the exchange rate, Central Bank of Russia started actively conducting sterilized intervention, presented in the form of repo operations. The purpose of this paper is to analyze the effectiveness of the sterilized interventions conducted by the Bank of Russia under the framework of the floating exchange rate regime. In this research it was built an exchange rate model, which includes oil prices, sterilized intervention, volatility index and the risk premium. To analyze the effectiveness of the sterilized interventions the vector error-correction model (VECM) is to be estimated on the daily data from November 2014 to April 2016. This model takes into account the integration relation between some factors, namely, between oil price and the exchange rate. The model also allows imposing certain restrictions on the coefficients. As a result, it was found that in the cointegration relationship, on average, a change in the oil price changes the value of the exchange rate by 52%. In case of deviation from the long-run cointegration, exchange rate changes by 9% on the daily basis to return to long-run equilibrium. The change of the sterilized interventions does not have a statistically significant impact on the change of the exchange rate. This result indicates the lack of effectiveness of sterilized interventions. Moreover, a comparative analysis of the effectiveness of nonsterilized intervention and of the role of oil prices in the exchange rate determination before 2014 has been conducted. The analysis has shown that in the 2008-2014 the oil price was less important in determining the exchange rate. As for the nonsterilized intervention, conducted by the Central Bank after 2009 financial crisis, they were also ineffective.