Time-varying parameters error correction model for real ruble exchange rate and oil prices: What has changed due to capital control and sanctions?

Abstract

This paper aims to analyze changes in the long-term and short-term oil price elasticities of the real ruble exchange rate, as well as the speed of convergence of the exchange rate to a long-term equilibrium. The analysis is conducted using an error correction model with time-varying parameters. The results indicate that the short-term oil price elasticity of the exchange rate has consistently increased after the 2008–2009 crisis, reaching its peak in 2015. This peak coincided with the implementation of an inflation targeting regime by the Bank of Russia, as well as economic crises caused by sanctions and a decline in oil prices. During this period, the short-term elasticity exceeded the long-term elasticity, leading to a significant “overshooting” effect in response to oil shocks. Subsequently, the short-term elasticity gradually decreased as the economic ­situation stabilized, and by 2022–2023, it became insignificant. This was influenced by such factors as the inaction of financial markets and the implementation of capital controls. On the other hand, the long-term oil price elasticity remained ­relatively stable throughout most of the observation period, although it decreased during crisis periods.