‘Navigating by the stars’ in monetary policy: the new issue of the Russian Journal of Money and Finance is out

Jerome H. Powell, Chairman of the US Federal Reserve, figuratively compared monetary policy to navigation by the stars (the stars represent many equilibrium parameters in the economy, such as the interest rate, the potential GDP and the non-accelerating inflation rate of employment), ‘Navigating by the stars can sound straightforward. Guiding policy by the stars in practice, however, has been quite challenging of late because our best assessments of the location of the stars have been changing significantly.’ One of these ‘stars’ is the equilibrium or neutral interest rate, at which the economy reaches its potential growth rate, while inflation reaches the central bank’s target. This rate cannot be observed; it can only be estimated. In their article, Alexey Porshakov and Andrey Sinyakov (Bank of Russia) consider the reliability of these estimates and ‘navigation by the stars’. They conclude that the neutral interest rate estimates are very uncertain, which makes them an important element of academic knowledge but barely expedient in practice.

The article by Alexander Tishin (Bank of Russia) studies how monetary policy affects macroeconomic variables and analyzes daily and intraday data on price dynamics of foreign exchange instruments. The author shows, in particular, that inflation in the key rate increase by the Bank of Russia reacts with a lag of several months, while tighter monetary policy increases the trade balance and depreciates the real effective ruble exchange rate.

The full issue of Russian Journal of Money and Finance No.4, 2019 is available on the website.