Two Monetary Policy Components in Russia: An Assessment for Bulk Data

Abstract

In this paper, we estimate the trend of monetary policy in Russia based on the decomposition of key monetary variables into two parts. The first part is supposed to be the response of monetary variables to the state of the economy spanned by the set of fundamental macroeconomic shocks. These shocks are extracted from the dynamic factor model estimated for a large number of variables. The second, residual, component is estimated from the comovement of innovations of the monetary variables. This allows us to uncover the common unobservable component, or the policy «trend». We show that the correlation of innovations of the monetary variables cannot be described by the first principal component. However, it could be explained by the two principal components corresponding to the interest rate channel and the quantitative effect of monetary policy. The results show that during the pre-crisis period the quantitative variables (such as monetary aggregates or foreign currency interventions) were dominating while after the 2008-2009 the priority of instruments has changed: the interest rates came to the fore. This result coincides with the qualitative analysis carried out by Pestova (2017). Our approach allows eliciting the periods of the monetary tightening and easing. The proposed methodology could be used in the analysis of the policy compliance with macroeconomic conditions.