'Engaging in Research Is Partly an Art and Partly a Craft'

Vyacheslav Kramkov's research focus is macrofinance, a field at the intersection of macroeconomics and financial markets. In this interview with the HSE Young Scientists project, he explains how economists develop their models, discusses the social dimension of science, and contends that the relationship between the dollar-rouble exchange rate and oil prices is no longer as tight as it once was.

Why I chose to pursue a career in science

I never imagined I would be specifically pursuing science. However, this turned out to be where I was at my best, as I realised based on the feedback from my teachers and academic supervisors. Overall, I observed how effortlessly I could grasp methods and generate ideas, unlike many of my peers. During the final years of my bachelor's, I already anticipated pursuing master's and doctoral programs with a scientific career in mind, where I would be developing projects, participating in research, and selecting my topics.

The subject of my research

The link between macroeconomics and financial markets. There are studies solely dedicated to macroeconomics, exploring how a country's economy operates as a whole and identifying the key processes that impact our financial well-being. There are studies on financial markets, focused on strategies for profit generation and techniques for optimising operations. At the intersection of these two domains, a new field has emerged: macrofinance. The example of our country demonstrates that we experience few domestic financial crises, and those that have occurred are predominantly driven by external factors. These connections are the subject of my studies.

Why macrofinance was invented

The 2008 crisis was a pivotal moment. It was a genuine crisis: people were losing their jobs, the quality of life was declining, and banks were not issuing loans. However, the causes of it all were beyond the scope of what macroeconomics was studying at that time. Seeking to explain this phenomenon, some economists, primarily American, pioneered a new field now known as macrofinance. I have been studying macrofinance in the Russian context.

What I take pride In

My greatest source of pride is the paper I recently authored, which will soon be published in Applied Econometrics. In it, I demonstrate which aspects of our financial market are influenced by foreign factors and which are independent.

There is a prevailing belief among practitioners that the prices of individual stocks, bond rates, and yield rates are influenced by foreign factors and promptly respond to global events. However, I have shown that domestic Russian factors have recently been playing a significantly larger role. In recent years, we have gained greater independence, making it increasingly important for us to focus on domestic developments rather than the events abroad.

For my research, I employed an econometric methodology for data analysis that I came across in recent foreign publications. I adapted, mastered, and applied this methodology—most likely the first in Russia to do so.

During my master's studies, I wrote a paper on how commercial banks determine interest rates on deposits and loans. Papers explaining the rationale of banks usually present their rates as contingent on the actions of the Central Bank: the Central Bank establishes the key interest rate, prompting banks to align theirs. However, I have demonstrated that commercial banks not only consider the actions taken by the Central Bank but also factor in their own forecasts. This implies that even before the Central Bank officially changes the key rate but merely hints at such an intention, commercial banks promptly adjust their rates to their advantage. For instance, they are quick to raise rates on loans and slow to lower them, while the opposite is true for deposit rates. There have been no previous studies addressing this topic.

My dream

I have a general fascination with what I do, but I don't confine myself to a singular goal to accomplish. I am simply exploring the topic consistently, step by step. There are currently several ideas that I would like to test. They mainly concern what lies ahead for us in the coming years. I have a sense that our reality will be somewhat different, not the same as it was before 2022. We will have different trading partners and alternative routes to access the financial market. Perhaps this will significantly impact our market—and indeed, it has already done so.

There will be changes in certain specific areas that interest me. Among these, the most intriguing and obvious is what will influence the dollar to rouble exchange rate. It has long been assumed that the exchange rate is highly dependent on the price of oil: when the oil price increases, the rouble strengthens, and conversely. And indeed, that was the case. However, there are indications suggesting that this connection has somewhat weakened. Now, the rouble exchange rate and oil prices seem to evolve independently of each other. I have conducted some preliminary calculations indicating this to be the case.

How ideas are born

Developing a model is the primary objective for all economists. A hundred years ago, there were no models whatsoever. People simply reasoned, and all academic papers were written in plain text, without formulas. This does not make them less significant, and they are thoughtfully conceived. However, nowadays, when someone wishes to convey an idea, they strive to present it in the form of a model, using either graphs or equations.

Creating a model is a challenge. One must consider which factors are crucial and which can be disregarded, and how to conceptualise the relationships between values or processes. It is helpful to see how colleagues have approached this in other papers. And gradually, various pieces come together to form a framework for my specific task. Next, I refine and streamline it, eliminating any unnecessary elements. This is a complex process that is not regulated or particularly structured. In many respects, it relies on intuition.

Once my model is constructed, I validate it using mathematical methods.

If I hadn't become a scientist

I would pursue a more conventional profession related to economics, such as auditing or financial consulting. If I hadn't pursued economics, I would probably have become a chef. It seems to me that economic modelling shares some similarities with cooking. We take various ingredients, combine them, and observe how they fit together. Engaging in economic research is partly an art and partly a craft. In some aspects, you require inspiration, while in others, you need solid technique.

Scientists I would like to meet

In my field, there are people who have pioneered methods, including mathematical ones, that we are currently using. They include James D. Hamilton, the author of a textbook on time series analysis. Or Mark W. Watson. Their ideas, which seemed outdated for a while, have proven to be remarkably enduring, and we find ourselves revisiting them. It would be interesting to discuss why more advanced models tend to be fragile, while simpler ones are often more suitable and flexible.

When it comes to economists who have passed away, I am particularly interested in Robert M. Solow. He researched economic growth and explained why people prosper in some countries but not in others. Why some countries experience rapid growth while others remain in crisis. His foundational model, which is widely studied today, describes the economic factors that do not account for growth. However, the factors that do account for growth remain unknown and beyond the scope of his model.

My typical day

My workday begins at 9 am, and before that, I aim to squeeze in a gym session. I typically have free time after 6-7 pm, and I often go out somewhere before heading home. There is a concept known as the third place, which refers to a space which is distinct from both home and work. It varies from person to person: some may go to restaurants, while others prefer shopping malls.

For several years, I was experiencing something like a burnout. I had not completed my studies yet but already needed to consider my future career. It was during that time that I developed the habit of having a third place to retreat to. This involves going to places to listen to jazz music, a genre I fell in love with back in school. There's a café in my city where they play jazz live and sometimes feature jam sessions. Jazz concerts are often held at the Philharmonic Hall. My favourite jazz musician is Herbie Hancock, whose music is simultaneously energetic and lyrical.

My interests besides science

Volleyball and skiing—both cross-country and downhill. I recently went skiing in Sochi. There had just been a big snowfall, with a meter of snow accumulating in a single day. As a result, many skiing locations were closed due to avalanche risk. I had to ski at the base of the hills, where it was permitted. But it was sufficient for me to enjoy a week there.

What I have watched recently

In January, I attended a modern rendition of the play 'The Third Truth, or The Story of a Crime' at the Nizhny Novgorod Drama Theatre. It left a strong impression on me. The play is set in the 19th century. On one hand, it features a discussion about better approaches to economic policies and organising society, questioning the necessity of private property. And on the other hand, a story of people's daily lives unfolds. These two narratives never intersect, and therein lies the drama.

This is akin to scientific pursuits, as scientists are sometimes criticised for residing in an ivory tower, detached from the world of ordinary people, for whom their results are considered irrelevant. It seems to me, however, that since at least the beginning of the 20th century, economists have taken steps towards addressing real-life problems and have become more attuned to the needs of ordinary people.

My beliefs

Considering the entire spectrum of possible beliefs, I would likely be classified as a liberal: I support both market-led regulation and minimal government intervention. However, when considering economists alone, my beliefs veer significantly from the mainstream, especially concerning globalisation, international cooperation, and the prevailing notion that it is imperative to participate in the global economy following the Western trajectory at all costs. In my opinion, we need to engage with all regions. While at the end of the 20th century, 60% of the global wealth was concentrated in the Western world, it is now less than half. Therefore, engagement with developing countries is at least as important as engagement with the West.

Perhaps this is my professional bias, but when I begin to contemplate a problem, it often seems like a purely economic one to me, where the economic factors are much more important than cultural, social, and political ones.

However, the standard for a scientist is to ensure that their views do not influence their scientific inquiry, since it is wrong to manipulate results to align with one's worldview. My perspective might influence my selection of ideas to pursue, but I am not consciously aware of it. A fish in the water is not aware of the water. If something seems right to me, I might not realise that it's just my perception.

Advice for those who choose a career in science

At some point, I found it helpful to experiment with a variety of things. We are expected to choose our life path around the age of 16, while still in school and with limited life experience. This is precisely why at university, you have the opportunity to attend different courses and explore various topics, and then make decisions during internships and initial employment experiences to see where they lead. And once you have accumulated sufficient experience, you can use it to make informed decisions when choosing a career.

My favourite location in Nizhny Novgorod

Strelka, or the Spit of Nizhny Novgorod at the confluence of the Volga and Oka rivers. I liked an entry in someone's diary saying that no resident of Nizhny Novgorod would ever find a city square spacious enough, as when looking from the embankment at Strelka, they see a vastness incomparable to anything else.