Russia’s Eternal Inflation

In eternal Russia, nothing changes when it comes to monetary management. Year after year, the Russian Central Bank (RCB) blames the weather, the poor harvest, or other non-monetary factors for its feeble performance in lowering the inflation rate.

Unlike many emerging-market and transition economies in the 1990’s, Russia did not abandon a fixed-exchange rate anchor in favor of an inflation-targeting regime as its guide to monetary-policy. As a result, the period since the financial crisis of 1998 has generated serious problems for monetary and exchange-rate policies. Faced with a balance-of-payments surplus – largely thanks to high oil prices – the RCB’s 2005 Monetary Program fudges: reducing inflation is a priority, but so is exchange-rate targeting in order to support growth.

This “just-do-it” approach works fine in the United States, for example, where the Federal Reserve has established its anti-inflationary credibility. But the RCB’s track record since 1992 has done little to stabilize inflation expectations and to persuade businessmen, investors, government officials and ordinary Russians that it is genuinely focused on reining in price growth.

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