Specifics of the impact of the Bank of Russia's monetary policy on the economies of the Eurasian Economic Union

Abstract

The article is a part of the author's (Zagoytiy V.L.) dissertation research. The purpose of this paper is to identify the key effects of the Bank of Russia's monetary policy on the economies of the Eurasian Economic Union. The authors' initial assumption is that the monetary policy shock of the Russian economy has the same effect on the economies of the other member states of the Eurasian Economic Union. The conclusions about the response of macroeconomic variables to economic policy shocks are based on impulse response function analysis. The authors conduct their modelling in two stages. In the first stage, we identify monetary policy shock for the Russian economy by constructing a vector autoregression model using standard Kholetsky decomposition. At the second stage, we analyze the impact of a Russian monetary policy shock on the economies of the EEU member states. The impact of this shock on the main macroeconomic indicators of the countries of the Eurasian Economic Union has been estimated using O. Jorda's local projections’ method. The analysis reveals the significant impact of the monetary policy of the Bank of Russia on the economies of Armenia and Belarus in the short term. The initial assumption that monetary policy shock of Russian economy has the same impact on the economies of other member states of the Eurasian Economic Union is disproved. The authors conclude that the monetary policy shock of the Bank of Russia is transmitted to the economies of the Eurasian Economic Union partner countries primarily through money markets, leading to an increase in market interest rates in Armenia and Belarus and, consequently, to a decline in industrial production. This reflects the operation of the currency channel of cross-border transmission of monetary policy, whereby a rate hike in a large regional economy triggers a rate hike in the region in order to prevent depreciation of national currencies