Disentanglement of natural interest rate shocks and monetary policy shocks nexus

This paper proposes a novel procedure for uniting the identification of monetary policy shocks and natural interest rate shocks. The Russian economy of the 2014–2019 inflation-targeting period is an empirical application of the approach. The model results allow us to make a number of policy conclusions: (i) unlike other papers on the Russian economy there is no output or price puzzles; (ii) over the past six years, monetary policy in Russia has become more predictable; (iii) the monetary transmission period from the key rate to inflation is six to eight months; (iv) monetary policy explains almost 20% of the inflation dynamics, while the natural interest rate explains around 40% of inflation; (v) the estimated natural interest rate declined from 2014 to 2019 following the global trends of declining interest rates; and (vi) the Bank of Russia follows mandate and reacts to inflation under the monetary policy feedback rule without responding to output fluctuations.