Evidence for the Interest Rate Channel in the IS Curve for the Russian Economy

The question of the existence of a relationship between the level of economic activity and the real interest rate is the most important in the construction of macroeconomic models. In economic theory since Keynes, the interest rate channel has been one of the key channels for the transmission of shocks of monetary and fiscal policies to macroeconomic indicators due to the impact on household consumption trajectories and investments. The efficiency of the interest rate channel plays a pivotal role in the discussion of monetary policy measures to stabilize economic activity. For instance, a change in the nominal interest rate subject to non-absolute price flexibility may affect the real interest rate, thereby affecting aggregate demand in the economy. However, the ability of the Bank of Russia to influence economic activity in the Russian Federation is often questioned due to the lack of stable empirical evidence of dependence of Russian output on the interest rate. The article examines the theoretical foundations of IS curve construction and presents a review of empirical research in this area. The hypothesis of a negative correlation between the output and the interest rate in the Russian economy is tested. The approach to estimating the structural equation of the IS curve involves considering deviations of the Russian GDP from the trend using the generalized method of moments for the period from Q1 1999 to Q3 2014. The results of the empirical analysis testify to the existence of a negative correlation between the economic activity and the real interest rate in Russia.