The Role of Oil Prices, Real Effective Exchange Rate and Inflation in Economic Activity of Russia: An Empirical Investigation

In this study we employ an empirical analysis to observe the impact of changes in inflation rate, real exchange rate instability and oil price fluctuations on the level of real economic activity of Russia. Vector Autoregressive Model (VAR) was represented and estimated along with Vector Error Correction Model (VECM). There was revealed the existence of long-run cointegration between the economic activity, the real effective exchange rate and oil prices over the 01/1995-03/2015 period. In addition, the effect of these factors on the economic output is positive. However, the cointegration with the inflation was not present in the long-run over the sample period. While, in the short-run only real effective exchange rate had an effect on the economy of Russia. The important feature of this research is that there was revealed an automatic adjustment mechanism in the model, which helps the economy of Russia to reach its equilibrium after the shock. The paper insists on implementation of the relevant reforms to the fiscal policy to diversify and strengthen the economy