The Role of Regional and Sectoral Factors in Russian Inflation Developments

Abstract

This paper examines the relative roles of region-specific and commodity-specific developments in the consumer price setting in Russia. For this purpose, we estimate a dynamic hierarchical factor model using inflation rates across regions and sectors. We found little evidence of association between region-specific factors and inflation developments, although there are several regions (mostly located in the Far East and North Caucasus) where the idiosyncratic component may contribute substantially. Conversely, the role of cross-commodity relative price changes in inflation developments in Russia is substantial.

Keywords: Dynamic Hierarchical Factor Model, Regional Inflation, Relative Prices, Russia

JEL Classification: C38, E31, D4