Russian economic policy: A model with discretionary policy or policy rules

Abstract

Models of dynamic stochastic general economic equilibrium (DSGE) are based on preferences and technologies. However, the behavior of the state is usually described using exogenous instrumental rules. In the face of significant changes in external conditions, such an approach can poorly predict the behavior of the state and, as a consequence, the economy. A DSGE model of Russia is developed, with the state conducting optimal policy for given purposes, along with a version in which the state follows instrumental rules. Parameters of the models were estimated by the maximum likelihood method and Bayesian inference (with a non-informative a priori distribution). The classical approach has affinity for the version with the optimal policy, and the Bayesian approach for the instrumental rules. The goals of the economic policy pursued in Russia are identified. In particular, the fight against inflation has low priority, and the stability of budget revenues has the highest priority. Estimates of a number of key parameters differ significantly for the two versions of the DSGE model, i.e. the type of state description significantly affects how the model of the rest of the economy should behave in order to comply with statistical data. At the same time, both versions of the model give almost the same quality of forecasts.