A MARKOV SWITCHING VECM MODEL FOR RUSSIAN REAL GDP, REAL EXCHANGE RATE AND OIL PRICES

Andrey Feliksovich Bedin,Alexander Vladimirovich Kulikov,Andrey Vladimirovich Polbin

doi:10.32479/ijeep.10667

Abstract

This paper considers an application of the Markov switching vector error correction model to the analysis of the long-run and the short-run dependence of Russian real GDP and real exchange on oil prices. An algorithm for estimation of the model with a priori information on a state of hidden Markov chain in some periods of time is provided. It is shown that for the period of 1999–2018 two different regimes are well defined: with a slow adjustment of real exchange rate and a sharp reaction of GDP in response to oil price shock and with a fast adjustment of real exchange rate and a slow adjustment of GDP in response to shock. We have concluded that floating ruble exchange rate is a natural stabilizer of the Russian economic activity.Keywords: Russian economy, GDP, real exchange rate, oil prices, error correction model, Markov switching model.JEL Classifications: Ð¡22, C51, E52, F31, F41DOI: https://doi.org/10.32479/ijeep.10667

Highlights

Oil prices are the most important determinant of economic development in Russia
When oil prices increase real gross domestic income (GDI) increases – an indicator that characterizes the assessment of domestic economy output at world prices and measures the purchasing power of the generated income (Polbin et al, 2020; Kohli, 2004)
Based on the developed model, we show that two regimes are identified in the dynamics of Russian macroeconomic indicators: rapid and slow adjustment of the real exchange rate to long-term equilibrium

Summary

INTRODUCTION

Oil prices are the most important determinant of economic development in Russia. To date, a large number of works have been published that indicate a positive relationship with oil prices of such key macroeconomic indicators of the Russian Federation as exchange rate (Bozhechkova et al, 2020; Gurvich et al, 2008; Nyangarika et al, 2019; Sosunov and Shumilov, 2005), real GDP (Beck et al, 2007; Polbin et al, 2019a; Sinelnikov-Murylev et al, 2014; Rautava, 2004), household consumption and investment (Benedictow et al, 2013; Lomivorotov, 2015; Polbin, 2017b; 2020; Sholomitskaya, 2017). After the introduction of the new fiscal policy rule in February 2017, the dependence of the real exchange rate on oil prices in the short term again weakened, which was confirmed in the work (Polbin et al, 2019b) based on a model with Markov switching regimes for real exchange rate. A key feature of Russian macroeconomic indicators dynamics is the intensification of structural changes and the change of regimes in economic policy This actualizes the construction of models with time-varying parameters. Based on the developed model, we show that two regimes are identified in the dynamics of Russian macroeconomic indicators: rapid and slow adjustment of the real exchange rate to long-term equilibrium. When constructing a vector error correction model in this paper, along with Markov switching in the

RESEARCH METHODOLOGY AND SPECIFICATION OF AN ECONOMETRIC

RESULTS

CONCLUSION