Part of this study had initially been completed at the Sberbank of Russia, and we are truly grateful to Konstantin Kozlov for helpful contributions to this research project. An early version of this paper was presented at the XII ESCB Emerging Markets Workshop in Saariselka (December 2014) hosted by the Bank of Finland Institute for Economies in Transition (BOFIT). We wish to thank the workshop participants and especially Heiner Mikosch for comments and suggestions. We also express particular gratitude to Michele Lenza for encouragement, as well as for providing valuable feedback and criticism. The views expressed in this paper are solely those of the authors and do not necessarily represent the official position of the Bank of Russia. All remaining errors are our responsibility.

Авторы выражают благодарность Е. Дерюгиной и К. Козлову за помощь в проведении исследования. Мнение авторов может не совпадать с официальной позицией Банка России.

During recent years the Russian money market has undergone substantial changes. The period of abundant liquidity was followed by temporary contraction in the end of 2007 and then by rapid deterioration of liquidity conditions in the second half of 2008. This paper provides the analysis of these developments, their causes and consequences. We then proceed by constructing a comprehensive model of the overnight rate on rubles on the Moscow interbank market (MIACR). We use martingale hypothesis to analyze the process of market interest rate determination and identify the liquidity effect. For this purpose we estimate the non-linear EGARCH model and calculate the contribution of different categories of explanatory variables to the interest rates dynamics and volatility. We find that, although volatile, the deviation of interbank overnight rate from BoRs policy rates can largely be explained by liquidity shocks. At the same we find the empirical confirmation of importance of exchange rate and foreign interest rates variables.

We estimate the natural rate of interest for Russia in the short term and long term using three definitions of the rate and discuss the possible implications of the results for monetary policy. To start with, we consider partial equilibrium (under no-arbitrage condition), which is presented in the papers on estimating the natural rate. The estimates turn out to be extremely sensitive to assumptions about model parameters. The estimates based on the uncovered interest rate parity, though dependent only on observable (market) variables, impose an additional strong assumption of the path of the future equilibrium exchange rate. We supplement these calculations with calculations in panel data (for long-term equilibrium) and using semi-structural methods (for current equilibrium). To get estimates according to the strict definition of the natural rate we estimate a real business cycle model of the resource-based economy with investments using Russian data. All the estimates are highly uncertain. Taking into account the latter, the central bank should use robust monetary policy rules and avoid communicating the natural rate at least until there has been a sufficient history of business cycles in Russia.

The role of monetary factor in generating inflationary processes in Russia has stimulated various debates in social and scientific circles for a relatively long time. The authors show that identification of the specificity of relationship between money and inflation requires a complex approach based on statistical modeling and involving a wide range of indicators relevant for the price changes in the economy. As a result a model of inflation for Russia implying the decomposition of inflation dynamics into demand-side and supply-side factors is suggested. The main conclusion drawn is that during the recent years the volume of inflationary pressures in the Russian economy has been determined by the deviation of money supply from money demand, rather than by money supply alone. At the same time, monetary factor has a long-run spread over time impact on inflation.