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The Influence of Verbal Interventions on Inflation Expectations In Developing Countries

Student: Mikhail Zhemkov

Supervisor: Olga Kuznetsova

Faculty: Faculty of Economic Sciences

Educational Programme: Applied Economics (Master)

Year of Graduation: 2017

Stability of inflation expectations are necessary part of the inflation targeting. Monetary and fiscal authorities try to influence the dynamics of inflation expectations through verbal interventions. This paper measures the effectiveness of verbal interventions of the Bank of Russia and the Government of the Russia on inflation expectations for the period from July 2015 to December 2016. Inflation expectations were measured by using financial data. We calculated the difference between the yields of nominal and index-linked government bonds. After that it was adjusted for the inflation risk premium and liquidity risk premium. Verbal interventions in this study are defined as factor variables that were classified into groups according to the degree of regularity, the source, the nature of the impact and the information content. Further, we constructed a model of conditional volatility of inflation expectations, which helps us to estimate the influence of verbal interventions on the inflation expectations. We came to the conclusion that both the Bank of Russia and the Government of the Russia can effectively influence the dynamics of inflation expectations. Also, we found a positive effect of verbal interventions on inflation expectations from individual members of the Government and employees of the Bank of Russia. The results obtained can subsequently be used to adjust monetary and fiscal policies, as well as for development of information policy tools.

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