Exogeneity of world oil prices to the Russian Federation’s economy and monetary policy

Abstract

This research investigates the interrelationship between the Russian Federation's main macroeconomic indicators, monetary policy and world oil prices using a vector autoregressive approach and monthly time-series data from January 1993 to December 2016. We selected the Russian Federation for this analysis because it is one of the largest oil exporting countries that is not a member of the Organization of the Petroleum Exporting Countries, and its oil revenues account for a significant proportion of the country's total export and budget revenues. We assume that oil prices are exogenously given to this country, despite being a large oil-exporter, and explain the oil price transition mechanisms to the Russian Federation's economy from the export side and through the fiscal channel taking into account the monetary policy factor. The results suggest that the impact of the oil price fluctuations on the country's gross domestic product, consumer price index inflation rate, interest rate, and exchange rate was more significant between 2000 and 2016 than between 1993 and 1999. To estimate the monetary policy rule for the Russian Federation, we test the modified Taylor equation and associated Taylor rule, including the oil price gap, since the latter may have a significant impact on the key policy rate. The evidence suggests that the Taylor rule describes the post-financial crisis monetary policy of the Russian Federation relatively well.

Oil Price Shocks and Economic Growth in Oil-Exporting Countries

“…Given the fact that oil accounts for a large part of exports, moreover, energy export revenues crucially contribute to the government budget, output will be positively linked with oil prices. This result is in line with the finding of Alekhina and Yoshino [2018] who estimate a VAR model and find a positive effect of oil price increases on Russian economy. They relate this positive effect to the fact that when oil prices experience a positive shock, the budget revenues and therefore investment opportunities increase which consequently stimulates output growth.…”

“…They justify this results by the possibility that, in many small oil producing countries, the oil sector is characterized by low levels of spare capacity and production adjustments are constrained. Alekhina and Yoshino [2018] estimate the impact of an oil price shock on two main macroeconomic indicators, which are real GDP growth rate and CPI inflation rate. They include the short-term interest rate and exchange rate in order to capture the indirect effect of oil price on the macro economy.…”

Empirical Analysis of Global Oil Price Determinants at the Disaggregated Level Over the Last Two Decades

“…As discussed in Alekhina and Yoshino (2018a), the literature on oil price movements and their sources and effects was pioneered by Hamilton (1983) and followed by wide number of studies. Among others, Kilian (2009) first differentiated between different types of oil shocks; Hamilton (2009) explained the oil shock of 2007-2008; Kilian and Hicks (2013) showed the contribution of an economic boom in emerging economies to the real price of oil; Askari and Krichene (2010) estimated the impacts of monetary policy, the exchange rate, and the prices of gas on the oil market; Peersman and Van Robays (2012) confirmed the cross-country differences in responses to oil price shocks; and Ratti and Vespignani (2014) assessed the impact of the oil supply sector on oil prices.…”

“…Huynh (2015) provides an estimation of the impacts of energy prices on the business cycle, while Taghizadeh-Hesary and Yoshino (2014) develop an oil demand and supply model considering a monetary policy variable. Alekhina and Yoshino (2018a) and Alekhina and Yoshino (2018b) show that oil price fluctuations have a significant impact on the macroeconomic variables and monetary policy of an energy exporting economy. Thus, it is of paramount importance to understand the sources of oil price volatility for policy makers, the private sector, and individuals.…”

Renewable Energy Deployment for Sustainable Development in the Asia Pacific: A Review

“…For instance, the trend of spot crude oil prices have increased tremendously between 2000 and 2012, roughly by 4 times but decreased significantly after 2014 (Figure 5). The dropping oil prices during 2014 and 2016 was one of the greatest oil prices decline since World War II (Alekhina and Yoshino, 2018). Among the factors that contribute to the supply glut was a steady oil supply in the Organization of the Petroleum Exporting countries (OPEC), increased oil exploration in the U.S. and Canada and political unrest in the Middle East countries (OPEC, 2017).…”