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Regular version of the site

New approach to macroeconomic stability

Priority areas of development: economics
2017
The project has been carried out as part of the HSE Program of Fundamental Studies.

Goal of research

Studying the optimal strategy of central banks in pricking asset bubbles for preserving financial stability, evaluation of the efficiency of sterilized intervention policy conducted by the Bank of Russia in 2014-2015, examination of the impact of the press releases after the Bank of Russia Board of Directors meetings on monetary policy issues on the Moscow Prime Offered Rate (MosPrime Rate), estimation of the value of financial repression income from nonmarket debt placement and deposit ceiling, determination of the role of global oil market shocks on real income dynamics in Russia, and, finally, providing a theoretical explanation of the middle income trap formation as a result of endogenous choice of political and economic institutions.

Methodology

For the studying the central bank’s optimal strategy in pricking asset bubbles a behavioral New Keynesian model based on the synthesis of New Keynesian macroeconomics and agent-based models is used. Moreover, to estimate and analyze a dynamic general equilibrium model the following tools are used: Blanchard-Kahn’s method of solution; Calman filter for likelihood function estimation, maximization procedures of Sims and Ratto; Markov Chain Monte-Carlo method for confidence intervals of IRFs; bootstrap methods of Hall and Efron-Tibshirani for estimation confidence intervals in vector error correction model. In addition, the event study method is applied. To study the issues of financial repression, a new-Keynesian dynamic general equilibrium model with elements of financial repression is constructed. Financial repression is imposed by the government as a requirement to hold government bonds with a below-market rate. To identify the oil market shocks and to measure the impact on the real incomes a structural Bayesian VAR with sign restrictions is used. Identifying restrictions are applied as explicit prior distributions for a set of parameters in the matrix of the contemporaneous interdependence. Finally, for studying the middle income trap a dynamic game that defines the level of investment in education, the tax rate, and the level of barriers to entry is considered.

Empirical base of research

Oil price dynamics (OPEC basket) and the data on currency repo auctions conducted by Bank of Russia in 2014-2017, datasets of the Bank of Russia (http://www.сbr.ru), the Federal State Statistics Service (http://www.gks.ru), KLEMS dataset (http://www.worldklems.net/data.htm), the World Bank  (http://databank.worldbank.org), the Federal Reserve Bank of St. Louis (https://fred.stlouisfed.org), and the International Monetary Fund (http://www.imf.org/en/Data).

Results of research

The results of this project indicate that the central bank’s strategy of pricking asset price bubbles can be a policy that enhances social welfare, and reduces the volatility of output and inflation; especially, in the cases when asset price bubbles are caused by credit expansion, or when the central bank conducts effective information policy. It is also argued that pricking asset price bubbles with the lack of the effectiveness of information policy, leads to negative consequences to social welfare and financial stability. Then, it is concluded that the reaction of the Russian ruble-US dollar exchange rate to the positive and negative sterilized intervention shocks is asymmetric. The response of the exchange rate on a positive shock has a correct sign and is statistically significant while its response to a negative shock is statistically insignificant. Moreover, it is shown that the press releases of the Bank of Russia can have a significant impact on the MosPrime Rate and its volatility. The assessment of dynamic fiscal multipliers under financial repression shows that it leads to a slight reduction in fiscal multipliers in the short and long terms. Additionally, numerical results show that monetary policy is characterized by a large effect of eliminating the public debt due to inflationary inertia. Moreover, it is shown that the shocks that have the largest influence on the real incomes are the supply shock and the speculative demand shock. Finally, this project studies the mechanism of middle income trap formation as well as explains the potential dynamics of technological progress, the level of education, and institutional quality in emerging economies.

Level of implementation, recommendations on implementation or outcomes of the implementation of the results

The results of this project can be used for monetary policy design in commodity exporting economies with a floating exchange rate regime. Moreover, this research clearly shows the potential of structural Bayesian modeling for policy evaluations. Overall, the results of this project can be used as policy implications for the countries that experience economic and financial instability.

Publications:


Sokolova A., Havránek T., Rusnák M. Habit formation in consumption: A meta-analysis // European Economic Review. 2017. Vol. 95. No.  June 2017. P. 142-167. doi
Веселов Д. А. Теория экономического роста: новые методы и возможности // Журнал Новой экономической ассоциации. 2017. Т. 2. № 34. С. 176-181.
Шульгин А. Г. Два типа шоков монетарной политики в DSGE-модели, оцененной для России // Журнал Новой экономической ассоциации. 2017. Т. 33. № 1. С. 75-115.
Кузнецова О. С., Жемков М. И. Измерение инфляционных ожиданий в России на основе данных фондового рынка / Высшая школа экономики. Серия WP12 "Научные доклады лаборатории макроэкономического анализа". 2017. № 1.
Vasilenko A. S. Should Monetary Authorities Prick Asset Price Bubbles? Evidence from a New Keynesian Model with an Agent-Based Financial Market / National Research University Higher School of Economics. Series WP BRP "Basic research program". 2017. No. 182.
Peiris U., Sokolova A., Tsomocos D. Capital Flows, Default, and Renegotiation in a Small Open Economy / University of Oxford. Series Saïd Business School "WP 2017". 2017. No. 03.
Мамедли М. О. Фискальная политика в условиях несбалансированной пенсионной системы // Экономический журнал Высшей школы экономики. 2017. № 1. С. 114-144.