Demand, supply, monetary policy, and oil price shocks in the Russian economy (Analysis based on the BVAR model with sign restrictions)

Abstract

This paper considers a simple Bayesian vector autoregressive model for the Russian economy based on data for real GDP, GDP deflator and oil price as an exogenous variable that acts as a proxy variable for the terms of trade. Along with the impact of oil price shocks, the model estimates the impact of supply and demand shocks, the identification of which is based on the approach of sign restrictions. According to the results obtained, at the end of 2014 and in 2015, demand shocks had a positive impact on GDP growth, which can be interpreted as a positive effect of the ruble devaluation at the end of 2014. In the next years, demand shocks led mainly to a slowdown in economic growth. The paper also attempts to identify monetary policy shocks and assesses their impact on GDP, household consumption and investment. According to the results, the effect of monetary shocks in 2015—2019 on all endogenous variables was negative. However, an increase in the interest rate at the end of 2014 is identified mostly as an endogenous reaction to other shocks, and the effect of the monetary shock on GDP in 2015 is nearly zero. In 2017, monetary shocks slowed down GDP by 0.92 percentage points.