Money-based inflation risk indicator for Russia: a structural dynamic factor model approach

The authors estimate a dynamic factor model for the cross-section of monetary and price indicators for Russia.  They extract the common part of the dataset's fluctuations and decompose it into structural shocks.  One of the shocks identified has empirical properties (in terms of impulse response functions) that are fully in line with the theoretically expected relationship between money growth and inflation, confirming that the process identified has the capacity for economic interpretation.  Based on the finding, recent inflationary developments in Russia are decomposed into those that are associated with changes in monetary stance and other shorter-lived shocks.  The analysis in this paper is based on the course material taught in the CCBS course: 'Applied Bayesian Econometrics for central bankers'.