Monetary regime choice and optimal rationing of credit at official rate: the case of Russia

NRU Higher School of Economics , 2015. No. WP BRP 103/EC/2015.

Shulgin A. G.

Stabilizing monetary policy in small open economy is constrained by the open economy trilemma. In a crisis this constraint may not allow Central Bank to cut interest rate because it may cause huge capital flight and subsequent problems. In this paper we investigate whether performed by Central Bank rationing of credit at official rate may soften open economy trilemma constraint and improve results of monetary policy for different monetary regimes. We construct the DSGE model appropriate for analyzing forward-looking behavior of households facing nonzero probability of credit rationing at official rate. Simulation of estimated on Russian data model and welfare optimization exercises allow to make contribution to the question of optimal monetary regime choice and to analyze the role of credit rationing for different monetary regimes. We have found significant credit rationing in quarterly Russian data of 2001-2014. The shares of liquidity constrained (non-Ricardian) household and probability of rationing credit at official rate are estimated as 22% and 66% respectively. Welfare maximization exercises reveal tradeoff between low-inflation and high-welfare solutions and witness in favor of floating exchange rate regime. Researching of credit rationing at official rate gives mixed result. On the one hand we have found optimal value of probability of rationing credit at official rate in both exchange rate-based and Taylor rule-based models. On the other hand resulting improvement in welfare is very small.

Keywords: Russia, DSGE, Bayesian estimation, intermediate exchange rate regime, exchange rate rule, rationing of credit

Publication based on the results of: Fiscal and monetary policy under financial market imperfections (2015)