Interest rate policy of the Bank of Russia in conditions of fiscally-dominant regime: Risks and prospects

The monetary policy of the central bank is considered in two regimes: the monetary-dominant regime and the fiscally-dominant regime. The article shows the reasons and conditions for the transition of central banks to monetary policy following the dominant fiscal regime. This transition allows the central bank to include fiscal components in its monetary policy that affect the rate of inflation, the dynamics of real interest rates, the state of the primary budget deficit/surplus, the cost of servicing government and corporate debt, and the rise/decrease in long-term bond yields. Under the dominant fiscal regime, the central bank must first lower real interest rates, which can reduce the cost of servicing public debt. The central bank must keep the debt (relative to GDP) at a level at which price increases in the economy are always relative to the real cost of servicing the public debt or the present value of taxes collected minus all budget expenditures. The central bank can reduce inflation by redistributing real payments across the maturities of government debt. Risks of the fiscally-dominant regime arise as a result of erroneous monetary policy and the absence of the necessary fiscal components in the macroeconomic forecast of the central bank.