Daily interventions by the Central Bank of Russia in the Treasury bill market

Abstract

This paper presents estimates of a daily reaction function of the Central Bank of Russia for the period 1 October 1996–1 October 1997. The dependent variable is daily purchases/sales of the Bank in the Treasury bill market. The short run objectives of the Bank identified are the avoidance of excessive fluctuations in market interest rates, of excessive fluctuations of the rouble exchange rate and of excessive influences of foreign exchange market interventions on the rouble monetary base. The paper finds a systematic and significant reaction of the Bank to changes in market yields, to deviations of the market exchange rate from the central rate of the narrow rouble–US dollar corridor, to changes in the regulations concerning repatriation of foreign capital and to changes in the differential between yields on taxable and nontaxable Treasury bills. The reaction of the Bank to the latter three variables reflects the desire to sterilize international reserve flows and to avoid excessive fluctuations of the rouble monetary base. However, the study also finds a significant change in behaviour in the period 1 April–17 June 1997 when in the face of very large capital inflows the Bank reinforced the effect of reserves inflows on the monetary base instead of sterilizing it. This change led to excessive growth in the money supply which may have aggravated the foreign exchange crisis in the last months of 1997. Copyright © 1999 John Wiley & Sons, Ltd.