Effect of key rate changes on investment in regions and effect of government support in mortgage lending: new issue of Russian Journal of Money and Finance

December 24, 2021

The fourth issue in 2021 of the scholarly quarterly Russian Journal of Money and Finance has been published.

Not every economic theory is confirmed by practice. Filipp Prokopev (University of Michigan), the winner of the Second Economic Research Competition for Students and PhD Fellows organised by the Bank of Russia and the Russian Journal of Money and Finance, tests the result of two theories. According to the first one, the higher the net worth of a firm, the lower the external finance premium. The second theory suggests that changes in the central bank’s policy rate affect the net worth of firms, including through loan interest payments. Together, these theories imply that the higher the leverage, the stronger the effect of changes in the monetary policy rate on the cost of funds the firm raises in the domestic market. However, a study based on the data of the credit spreads of Russian corporate bonds did not show such correlation: the effect of a policy rate change was the same for companies with different levels of leverage.

Contrastingly, fixed capital investments in Russian regions respond differently to monetary policy, as demonstrated by Andrei Shevelev and his co-authors from the Siberian Main Branch of the Bank of Russia. Regions with a large share of the mining and quarrying sector in GRP are the least responsive to key rate changes, whereas regions dominated by manufacturing show the strongest response. The authors suggest that the revealed differences might be associated with differences in the relative amount and the main sources of investment in the manufacturing and the mining and quarrying sectors and the focus of the latter on the external market.

Programmes aimed at increasing housing affordability are not always successful as they provoke higher demand and, thus, push up housing prices. Ianina Roshchina and Natalia Ilyunkina (Lomonosov Moscow State University) analyse how the mortgage rate subsidy programmes implemented by the Russian Government in 2015–2016 and 2020–2021 influenced housing affordability. The authors conclude that the first programme launched amid soaring interest rates may be considered successful as the impact of the reduced mortgage rate on housing affordability was stronger than the effect of growing housing prices. The second programme (Preferential Mortgage at 6.5%) designed to prevent a decline in demand in the pandemic situation had mixed results: borrowers benefited from subsidised interest rates only for a certain period – in some regions, a surge in housing prices had already wiped out all the benefits of the programme for borrowers by the end of 2020.

These and other papers from the new issue of the Russian Journal of Money and Finance are available on its website.

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