This study aims to investigate the Russian Central Bank’s reaction function during the country’s transition to inflation targeting, a period marked by severe external shocks, including sanctions and volatile oil prices and domestic economic shifts. The objective is to understand how these challenges shaped the Central Bank’s monetary policy strategy.
This study uses Taylor’s rule framework to estimate the reaction function, using a dual econometric approach for quarterly data from 2013 to 2024. First, the study applies the logistic smooth transition regression to capture the non-linear dynamics of the key rate over different regimes. Second, it uses the Markov-switching regression to identify shifts in policy inertia by distinguishing between stable and aggressive policy responses.
The empirical estimates reveal the presence of non-linear behaviour of monetary policy with strong persistence in the policy rate. Also, the non-linear state is characterized by a rapid reversal. The inflation gap exhibits a significant impact across regimes, with coefficients of 0.414 in one regime and 2.46 in another. The Gross Domestic Product (GDP) gap, on the other hand, is observed to be statistically insignificant. In addition, the augmented model that includes the exchange rate confirms similar regime dependencies. However, the Markov-switching estimates reveal a persistent policy inertia during stable periods and more aggressive policy adjustments when faced with extreme conditions.
The study complements the existing monetary policy reaction by providing additional empirical insights into transitional monetary policymaking. It demonstrates how gradual adjustments, and abrupt shifts coalesce to counter macroeconomic uncertainty.
