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.

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In this paper, we analyze a number of monetary and FX policy alternatives using the model of a small open oil-exporting economy hit by severe balance-of-payment shocks, such as those that simultaneously affected the Russian economy in 2014-2015. For our purposes, we modify Romer's (2013) IS-MP general equilibrium model by adding a structure similar to the Russian economy (tradables and oil vs. non-tradables).In the model, we consider an optimal policy mix that includes a floating exchange rate, FX liquidity provision by a central bank and temporary tightening of monetary policy . The flexible exchange rate works as a shock absorber, helping restore aggregate demand and domestic production. If inflation expectations are not anchored, contractionary monetary policy helps to stabilize them. Financial stability risks are addressed by lending FX liquidity to the banking sector.

Petersburg in early July. 2 This review will briefly summarise the discussions with a strong focus on research insights, both the authors' and our own, that are of practical importance to central bank policy.