Abstract
This research analyses regional heterogeneity in the reaction of core inflation to shocks of a single monetary policy on the example of Russia. We use a global vector autoregression model to reveal impulse response functions of core inflation in Russian regions to monetary policy shocks. The average 5-year cumulative response of regional core inflation to a MIACR shock of 1 percentage point (pp) is ‒0.74 pp. For 77 out of 80 regions, the 5-year cumulative core inflation response is found to be statistically significant. If we exclude three statistically insignificant responses and discard the four regions with the highest and lowest responses, we get a spread of ‒0.55 to ‒0.93 pp with a standard deviation of 0.12. We show that, over a one-year horizon, the heterogeneous response to monetary policy shocks can moderately reduce the heterogeneity of the response of regional inflation to exchange rate shocks. However, the magnitude of this effect is limited. According to the analysis of the regional heterogeneity factors, the higher are the share of extractive industries in the gross regional product of a region, the share of loans to manufacturing sector, the share of loans to small enterprises, as well as the unemployment rate, the stronger will be the reaction of the core inflation to the monetary policy shock. The degree of heterogeneity in the Russian regions’ core inflation response to monetary policy shocks, the set of factors explaining this heterogeneity, and the explained variation in the regional response (30–40% depending on the model specification) turn out to be comparable to similar indicators in other countries with pronounced regional heterogeneity.
Highlights
Russia belongs to a group of countries with pronounced regional heterogeneity,1 for which a single monetary policy, firstly, does not fully correspond to the business cycle of each specific region, and, secondly, has an uneven impact on the economies of non-identical regions
We identified the response of core inflation in the Russian regions to the shocks of a single monetary policy and analysed the impact of various factors on the intensity of this response
In order to obtain the impulse response functions (IRFs) of the core inflation to monetary policy shocks, we estimated a global vector autoregressive model (GVAR) model where the global variables of MIACR, foreign exchange rate and oil prices were included in the dominant unit vector autoregressive models (VAR), and the regional core inflation and interest rate on rouble loans to households in the region were included in the regional VAR
Summary
Russia belongs to a group of countries with pronounced regional heterogeneity, for which a single monetary policy, firstly, does not fully correspond to the business cycle of each specific region, and, secondly, has an uneven impact on the economies of non-identical regions. After we had tried various options for specifying a proxy for the currency channel used in the literature: regional trade balance, net exports, imports and exports, we discovered that all of them do little to explain the heterogeneity of the regional core inflation response to monetary policy shocks This result is not unique: for example, Ridhwan et al (2014) find no empirical evidence for the significance of the contribution of this channel in the regions of Indonesia, and Barran et al (1996) and Clements et al (2001) obtain a similar conclusion for the euro area countries in the period before the introduction of a single currency. In the first part of the section, we discuss the GVAR methodology; in the second part, a GVAR model is used to estimate the regional inflation response to monetary policy shocks
Sign-in/Register to view highlights & summary Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
