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Inflation and Monetary Policy in Russia: Transition Experience and Future Recommendations

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Author Info

  • Marek Dabrowski
  • Wojciech Paczynski
  • Lukasz Rawdanowicz

Abstract

This paper seeks the main factors behind inflation in Russia over the period 1996–2001. It presents a succinct description of Russian monetary policy and inflation developments. The econometric analysis establishes a long-run relationship between demand for the real money balances on the one side and the real income and short-term interest rate on the other side. It also presents several specifications of modeling shortrun dynamics of inflation. An account is made for the change in the exchange rate regime after the financial crisis of August 1998. It finds that apart from strong inertia, money expansion and exchange rate depreciation played a role in fueling the CPI. However, there were significant shifts in the underlying trends driving inflation during the studied period. Until 1999 fiscal policy posed the biggest obstacle to the disinflation process in Russia. In 2000–2001 the main responsibility for sustained inflation pressure can be attributed to monetary policy trying to target money supply and exchange rate at the same time. The way out from this policy trap leads through the adoption of one of the so-called 'corner' solutions, i.e. either a permanently fixed exchange rate, or independent monetary policy under a free float regime. Taking into consideration a historically limited credibility of macroeconomic policy and the high level of dollarization, the first variant seems to be a better solution for Russia. However, its implementation would require the accompanying fiscal, banking and other structural reforms creating a healthy policy-mix and flexible microeconomic environment.

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Bibliographic Info

Paper provided by CASE-Center for Social and Economic Research in its series CASE Network Studies and Analyses with number 0241.

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Length: 58 Pages
Date of creation: 2002
Date of revision:
Handle: RePEc:sec:cnstan:0241

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Keywords: inflation; exchange rate and monetary policy; Russia;

References

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  1. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange rates and financial fragility," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 329-368.
  2. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," NBER Working Papers 5191, National Bureau of Economic Research, Inc.
  3. Adam Bennett & Eduardo Borensztein & Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
  4. Philipp Rother, 2002. "Inflation in Albania," Post-Communist Economies, Taylor & Francis Journals, vol. 14(1), pages 85-107.
  5. Komulainen, Tuomas & Pirttilä, Jukka, 2000. "Fiscal Explanations for Inflation: Any Evidence from Transition Economies?," BOFIT Discussion Papers 11/2000, Bank of Finland, Institute for Economies in Transition.
  6. Ernesto Hernández-Catá, 1999. "Price Liberalization, Money Growth, and Inflation During the Transition to a Market Economy," IMF Working Papers 99/76, International Monetary Fund.
  7. Bennett T. McCallum, 1999. "Theoretical Issues Pertaining to Monetary Unions," NBER Working Papers 7393, National Bureau of Economic Research, Inc.
  8. Alex Mourmouras & Steven Russell, 2000. "Smuggling, Currency Substitution and Unofficial Dollarization," IMF Working Papers 00/176, International Monetary Fund.
  9. O. Liu & Olumuyiwa Adedeji, 2000. "Determinants of Inflation in the Islamic Republic of Iran," IMF Working Papers 00/127, International Monetary Fund.
  10. Jean-Claude Nachega, 2001. "A Cointegration Analysis of Broad Money Demand in Cameroon," IMF Working Papers 01/26, International Monetary Fund.
  11. Paula De Masi & Vincent Koen, 1997. "Prices in Transition," IMF Working Papers 97/158, International Monetary Fund.
  12. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, September.
  13. Sanja Kalra, 1998. "Inflation and Money Demand in Albania," IMF Working Papers 98/101, International Monetary Fund.
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Citations

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Cited by:
  1. Starr, Martha A., 2005. "Does money matter in the CIS? Effects of monetary policy on output and prices," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 441-461, September.
  2. Akram Esanov & Christian Merkl & Lúcio Vinhas de Souza, 2004. "A Preliminary Evaluation of Monetary Policy Rules for Russia," Kiel Working Papers 1201, Kiel Institute for the World Economy.
  3. Esanov, Akram & Merkl, Christian & Vinhas de Souza, Lúcio, 2004. "Monetary Policy Rules for Russia," BOFIT Discussion Papers 11/2004, Bank of Finland, Institute for Economies in Transition.

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