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Financing the storm : macroeconomic crisis in Russia, 1992-93


  • Easterly, William
  • da Cunha, Paulo Viera
  • DEC


The authors examine Russia's macroeconomic crisis in 1992 and 1993, focusing on fiscal and monetary policies. They show how the large transfers from the government to the enterprise sector exacerbated the crisis. Money creation did not finance the narrow (cash) budget deficit of the government. Rather, money creation financed the huge directed credit programs aimed at specific sectors and enterprises, including assistance to other economies of the former Soviet Union to sustain Russian exports. During 1992 enterprises and households financed this effort with their large flow of savings, but while enterprises largely avoided the inflation tax, households did not. Enterprises benefited most from the loose fiscal and monetary policies of the Russian government in 1992-93. The enterprises were net recipients of transfers from the budget and the main beneficiaries of the inflation tax (which nearly offset their own inflation tax payments). The main losers from high inflation were households. As many have noted, inflation in Russia correlates well with past money growth. Real money and the real exchange rate are also closely correlated. Money demand in Russia is well above international comparisons, controlling for inflation and negative interest rates. But the trend of money demand is obviously down. Current levels of monetary financing cannot be maintained without an increase in inflation. Even if the government takes no actions that lower money demand, it will fall anyway as the financial system and households and enterprises adjust to inflation. Banks and enterprises are finding ways to reduce the float and excess reserves with the central bank. Stabilization of inflation will thus be a race between the authorities'willingness and ability to tighten monetary and fiscal policy and the adjustment of enterprises and households to exisiting inflation.

Suggested Citation

  • Easterly, William & da Cunha, Paulo Viera & DEC, 1994. "Financing the storm : macroeconomic crisis in Russia, 1992-93," Policy Research Working Paper Series 1240, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1240

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    References listed on IDEAS

    1. Philippe Aghion & Olivier J. Blanchard, 1994. "On the Speed of Transition in Central Europe," NBER Chapters,in: NBER Macroeconomics Annual 1994, Volume 9, pages 283-330 National Bureau of Economic Research, Inc.
    2. Steven T Phillips & Vincent Koen, 1993. "Price Liberalization in Russia; Behavior of Prices, Household Incomes, and Consumption During the First Year," IMF Occasional Papers 104, International Monetary Fund.
    3. Giovannini, Alberto & de Melo, Martha, 1990. "Government revenue from financial repression," Policy Research Working Paper Series 533, The World Bank.
    4. Qimiao Fan & Mark E. Schaffer, 1994. "Government financial transfers and enterprise adjustments in Russia, with comparisons to Central and Eastern Europe," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 2(2), pages 151-188, June.
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    Cited by:

    1. Buckley, Robert & Cartwright, Kim & Struyk, Raymond & Szymanoski, Edward, 2003. "Integrating housing wealth into the social safety net : the elderly in Moscow," Policy Research Working Paper Series 3115, The World Bank.
    2. Buiter, Willem H. & Lago, Ricardo & Rey, Hélène, 1997. "Enterprises in Transition: Macroeconomic Influences on Enterprise Decision-making and Performance," CEPR Discussion Papers 1601, C.E.P.R. Discussion Papers.
    3. World Bank, 2003. "The Russian Labor Market : Moving from Crisis to Recovery," World Bank Publications, The World Bank, number 15007, March.
    4. 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.
    5. Buckley, Robert & Cartwright, Kim & Struyk, Raymond & Szymanoski, Edward, 2003. "Integrating housing wealth into the social safety net for the Moscow elderly: an empirical essay," Journal of Housing Economics, Elsevier, vol. 12(3), pages 202-223, September.
    6. Nikolic, Milan, 2000. "Money Growth-Inflation Relationship in Postcommunist Russia," Journal of Comparative Economics, Elsevier, vol. 28(1), pages 108-133, March.
    7. Stijn Claessens & Daniel Oks & Rossana Polastri, 2000. "Capital Flows to Central and Eastern Europe and the Former Soviet Union," NBER Chapters,in: Capital Flows and the Emerging Economies: Theory, Evidence, and Controversies, pages 299-339 National Bureau of Economic Research, Inc.
    8. De Melo, Martha & Denizer, Cevdet, 1997. "Monetary policy during transition : an overview," Policy Research Working Paper Series 1706, The World Bank.


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