Monetary Regime Choice and Optimal Credit Rationing at the Official Rate: The Case of Russia
Stabilizing monetary policy in a small open economy is constrained by the open economy trilemma. In this paper we investigate whether foreign exchange market interventions and the Central Bank’s credit rationing at the official rate (CROR) may soften this constraint and improve the results of monetary policy for different monetary regimes. We construct a DSGE model appropriate for analysing the forward-looking behaviour of households facing non-zero probabilities of losing access to financial market and CROR.
We have found significant credit rationing in the quarterly Russian data of 2001:Q1–2014:Q2. The probability of losing access to financial market and the probability of CROR are estimated as 22% and 66%, respectively. Using Russian data of 2001:Q1–2014:Q2 we demonstrate that CROR provoked forward-looking activity in financial market, which led to more Ruble devaluation in the crises of 2008-2009. It improved poor countercyclical performance of two Russian monetary policy rules, whereas made small effect on welfare. Welfare maximization exercises reveal a trade off between low-inflation and high-welfare solutions and favour of a floating exchange rate regime. We found the optimal value of the probability of CROR in both exchange rate-based and Taylor rule-based models but resulting improvement in welfare is very small.