Nikolic, M; (2003) Money supply-inflation relationship in postcommunist Russia. Doctoral thesis , University of London.

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Abstract

Numerous empirical studies have been devoted to analyses of diverse inflation processes and have demonstrated consistent patterns for money price relationships for various market economies. While these propositions may be valid for market economies, they do not seem to be holding for the majority of transition economies. Except for Russia and Poland, no systematic pattern for the money price relationship was detected in transition economies in the first half of the 1990s, thus undermining the conventional monetarist view at least in the transitional context. If indeed this were the case, it would imply among other things, that traditional tools used for stabilization and control of inflation in advanced market economies may not be appropriate for transition economies. The main objective of this dissertation is to scrutinize critically and rigorously inflation process in post-communist Russia, and the strength, dynamics, and causality of the relationship between inflation and various monetary aggregates. In particular, we test, whether lagged inflation has been an important determinant of contemporaneous rise in prices in this transition economy. In addition, we test whether there is a significant relationship between inflation and various monetary aggregates, and whether the lower inflationary environment that emerged in Russia in 1994, and especially in 1995, has caused the transmission of monetary impulses to future inflation to become both, slower and weaker. Furthermore, in a twofold aim, we shed some additional light on the issue of the choice of lag selection criteria in causality testing on one hand, and the issue of suitability of monetary aggregates for influencing and controlling inflation via policy instrument, in transition economies like the Russian Federation, on the other. Moreover, since each segment of our analysis contributes to the evaluation of the suitability of stabilization attempts in Russia, the role of international financial institution under whose influence stabilization was conducted, is inevitably brought under the spotlights. In this context, the dual role of the International Monetary Fund (IMF), of being the main coordinator of the Western assistance to Russia on one hand, and the main guide to Russian economic policy on the other, merits a special attention. Finally, suggestion for further research and conclusion from the analysis are outlined. The most important findings contained in this summary are delineated bellow. Our analyses of macroeconomic instability in Postcommunist Russia emphasises the necessity of coordination of fiscal and monetary policies. Although Russia may not be an economy with a fiscal dominant regime, the study demonstratest hat continuing problems with balancing of goverm-nenbt udget have led to eventualm onetisationo f the deficit. The analyses presented in the dissertation reiterate the notion that monetisation of the deficit, rather than the deficit themselves has been affecting the price level in Postcommunist Russia. In contrast to earlier claims, this study produces ample evidence that lagged inflation has been an important determinant of contemporaneous rise in prices in Postcommunist Russia. Using very simple autoregressive models, economic agents were able to make consistent, unbiased, and efficient one-month ahead forecasts of inflation. Although not rational in the strong form of efficiency, inflationary expectations together with a prevailing inflationary inertia ought to have been taken into consideration in stabilisation efforts. The preference for the orthodox money-based stabilisation programs indicates that this was not the case in this transition economy prior to July 1995. The analysis presented in this dissertation illustrates that the influence of changes in broad money growth on future inflation is considerably weaker and more protracted as the new economic environment in Russia has become more stable. Our evidence suggests that, the systematic pattern for money price relationship is fading in the new environment. Also, the average speed of transmission from changes in the growth of ruble broad money to inflation has shifted from just over three months in the first two and a half years of transition to just short of five months thereafter. In addition, the models of inflation presented in the dissertation give a reasonably good short hand description of the fundamental inflation process in Russia. The results presented in this chapter also unequivocally point out that the choice of a lag length in distribute lag models can be critical for the outcome of causality testing. Among variety of ad hoc and statistical criteria for the optimum lag length selection, the Akaike's FPE criterion is found to outperform all others. Leaning on these results, the study found the existence of the feedback or bilateral causality between inflation and broad money in Postcommunist Russia. The findings question the wisdom of choosing moneybased stabilization as the optimal policy advice for this transition economy. Finally, this chapter argues that the IMF financial and good technical assistance to Russia in the 1990s has been less than generous. Not only the size of the assistance might have not been adequate but also the timing and actual disbursements of these funds were in sharp discord with pledges. More importantly, the IMF made a number of serious policy mistakes in both design and the implementation of the reforms, which significantly contributed to a delay in stabilisation of the economy and were thus costly in terms of the loss of welfare to the society. However, the IMF, as a main guide and a coordinator of the Western assistance to Russia, has done just enough to spoon-fed Russia to the point of no return to planned economy and autarky.

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