Research paper on Russia’s Evidence for Sign and Parametric Restrictions in the Analysis of Monetary Policy Shocks

Description

Title: Russia’s Evidence for Sign and Parametric Restrictions in the Analysis of Monetary Policy Shocks

Abstract: The majority, if not all, of the studies in the literature that looked at how monetary policy implications affected macroeconomic aggregates had mistaken impulse reactions. This study applies the new Keynesian model by imposing the sign and parametric restrictions to investigate the effects of policy shocks on the economic aggregates for Russia by implementing SVARs, overcoming the limitations in the existing literature and filling the gap in the literature. This method outperforms other existing approaches and yields a better understanding of the impacts of monetary policy shocks on the Russian economy. By using prior knowledge, our method stays clear of implausible overshooting reactions to the subject innovations as well as impulse response anomalies like the price puzzle. Our results show that monetary policy shocks have a tolerable negative impact on the output gap even though they significantly reduce inflation in the short run for both median target responses and median responses. Demand shocks, on the other hand, do not significantly increase output but do cause inflation, whereas cost-push shocks have a significant negative impact on both inflation and output. The findings demonstrate the short-run nonneutrality of monetary policy intervention, which takes us one step closer to validating the new Keynesian theory in the Russian case. Our research also revealed that interest rates react strongly to both supply and demand shocks, as well as to cost-push shocks, which have significant negative effects on inflation and output. Our results demonstrate that the price puzzle problem can be successfully solved, that the new Keynesian theory, which states that monetary policy shocks only have a short-run effect, is valid, and that the Volcker-Greenspan rule may be a helpful guide for policymakers to effectively solve the problem. Additionally, as discussed in the conclusion section, policymakers can use our findings to implement critical policy recommendations.

Keywords: monetary policy; new Keynesian model; sign-restricted SVARs

Paper Quality: SCOPUS / Web of Science Level Research Paper

Subject: Economics

Writer Experience: 20+ Years

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