Monetary Policy

Forecasting and models

Making its monetary policy decisions, the Bank of Russia relies on both current and future economic trends. The reason is that monetary policy decisions are completely transmitted to aggregate demand and price growth with time lags, and accordingly, the whole process takes up to several quarters. The preparation and update of the Bank of Russia’s macroeconomic forecast is an integral part of the joint forecasting round. The Bank of Russia’s forecast relies on model-based calculations made using a wide variety of quantitative models.

Forecasting at the Bank of Russia

The Bank of Russia employs these models to analyse current economic conditions, provide a short-term forecast, and make calculations for its medium-term forecast with different assumptions and scenarios. The choice of statistical and analytical methods depends on the task, the subject of the research, and the nature of the data used (macro-level, micro-level or industry-specific data). The Bank of Russia is continuously enhancing and adjusting its models using new macroeconomic analysis and forecasting methods to properly respond to the current economic conditions which have a significant impact on the forecast.

Macroeconomic scenario forecasting and models used by the Bank of Russia (in Russian only)

Nowcasting and short-term forecasting models

The Bank of Russia’s short-term forecasts rely on econometric models and expert judgements. The forecasts employ a very wide range of data on current and expected dynamics of domestic economic conditions, financial markets, and the world economy. This is crucial for forming a comprehensive view of the economic development. Short-term forecasts are used to assess the economic situation in the near future and serve as inputs (initial values) in medium-term forecasting models.

Medium-term forecasting models

For medium-term forecasting, the Bank of Russia uses a set of models relying on the New Keynesian Dynamic Stochastic General Equilibrium (DSGE) approach. In terms of their structure, they have a lot in common with models employed by other central banks that have been successfully operating under the inflation targeting regime for a long time. Nevertheless, the models factor in the specifics of Russia’s monetary policy transmission mechanism and macroeconomic policy (in particular, the fiscal rule).

This group of models comprises the quarterly projection model (QPM) which is a flexible tool to analyse multiple forecast varieties and scenarios, while DSGE models of a small open economy with the public sector, the banking sector, etc. enable the Bank of Russia to obtain alternative estimates and incorporate structural assumptions not directly reflected in the QPM.