The Cost Channel of Monetary Policy Transmission in the Russian Economy

Abstract

Mechanics of the channels of monetary policy transmission mechanism is crucial for policy conduct of the Bank of Russia. Cost channel is the only channel that implies that growing interest rates could increase inflation. This article explores evidence for and against the cost channel in the Russian economy, especially the price puzzle. It is shown that price puzzle disappears when a proper TVP-FAVAR modeling setup is formulated, which could account for shifts in the Russian economy as well as in monetary policy regime. It could be suggested that any evidence for the presence of the cost channel belongs only to the beginning of the sample and vanishes completely after 2013.