Home  Journals  Finance and Credit  2(626) - 2015 January

The modified Taylor rule for the Bank of Russia based on mode switching

Vol. 21, Iss. 2, JANUARY 2015

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Available online: 18 January 2015

Subject Heading: Banking

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Pages: 14-21

Russian and foreign studies prove that the policy of central banks can be described by one or another version of the Taylor Rule. The Taylor Rule is a rule of a monetary policy, which defines how the interest rate changes in case of a change in GDP and inflation indicators. In particular, it states that for each percent of inflation growth a central bank has to increase the nominal interest rate by more than one percentage point. This aspect is often called the Taylor principle. The authors made an empirical assessment of the efficiency of the Bank of Russia policy and built an econometric model based on the nonlinear least square method. The authors used the data on inflation rate and GDP size from the official site of the Federal Service of State Statistics, and the inflation data - from annual reports of the Bank of Russia on principal direction of the unified State monetary policy. The authors calculated the GDP gap as a difference between the quarterly GDP value and its trend generated with the help of the Hodrick-Prescott filter. The results of the built model enabled to conclude that all indicators turned out to be significant. According to the original Taylor's work, the coefficient of inflation gap is 1.5, and the coefficient of GDP gap is 0.5. In our case, the coefficient of inflation gap was lower and made 1.13, and the coefficient of GDP gap - 0.4. On the basis of our calculations (the Chow test and evaluation of two econometric models for two sub-samplings: during pre-crisis and post-crisis periods), we found out that it is incorrect to apply the standard Taylor Rule to the Russian economy during crisis periods. We believe, it is necessary to develop a Taylor Rule, which the Bank of Russia can use in inflation targeting based on crisis situations.

Keywords: Taylor's model, monetary policy, inflation targeting

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