Research On Monetary Policy Choice In Russia’s Transition Process

There are two issues to focus when people do the academic researches on monetarypolicy choice. One is what monetary policy can do? Only after the clarity to it, thesecond issue can be discussed which is what kind of monetary policy strategy should bechosen? To the issue what monetary policy can do, Friedman argued that the target ofmonetary policy strategy should be focused on the price level in the nominal variable,rather than the real variables, for example, the employment rate. His concept has beenwidely accepted by the theorists and the policy makers all over the world. The finalobjective of monetary policy in mature market economy countries has been changedfrom full-employment to anti-inflation. In order to achieve this objective, it is needed tobuild a clear policy framework to restrain monetary policy. In practice, there are threemain monetary policy frameworks, which are inflation targeting, the exchange ratetargeting and monetary targeting. However, Russia chose multiple monetary policyobjectives in the Transition Process.Why has Russia chosen such monetary policy in the Transition Process? ShouldRussia choose anti-inflation as the core monetary policy objective? And how have thesethree widely-chosen monetary policy frames performed in Russia?This paper analysis monetary policy choice in Russia’s transition process from theeconomic and political perspective, with the research objectives as follows:(1) Todiscover the determining mechanism of the monetary policy choice in Russia’s transitionprocess.(2) To evaluate the economic effect of monetary policy choice in Russia’stransition process.(3) To investigate whether controlling inflation should be consideredas the core objective of monetary policy.(4) To discuss the applicability of the inflationtargeting, exchange rate targeting and monetary targeting in Russia.Around the subject above, paper mainly consists of the following chapters besidesthe chapter of Introduction,：In Chapter2, the theory framework of monetary policy choice in Russia’s transitionprocess has been given. On monetary policy choice, there has been a systematic study,which has been formed a great number of literatures and a set of mature theory. Throughanalyzing the previous researches, it can be found that the research of the choice of monetary policy is relatively weak under the constraint, which caused by thedisadvantages of the transition economies, let’s say, the central bank lacks itsindependence, the market develops slowly, etc. The transmission of monetary policy isan economic process, but the formulation is a political process, especially in thetransition economy. Therefore, the public choice theory is introduced to explain themonetary policy in transitional period, which builds the efficiency-public choiceframework about monetary policy choice in transition process.In Chapter3, the monetary policy choice in transition process has been reviewed,which has been divided into three stages: Stage1is from the "stabilization" strategy byusing "shock therapy" to the period of financing for Yeltsin authority’s deficit after1993.Stage2is from the reflection on the lessons of the financial crisis in1998, to Putin’s‘Great Power Strategy’, taken stabilizing the exchange rate as a priority target. And Stage3is after the2008financial crisis because since then it is considered as the core objectiveto control inflation.In Chapter4, efficiency-public choice framework was used to analyze themonetary policy choice in Russia’s transition process, and put forward and discussed theconcept of "non-neutral monetary policy interests ". Monetary policy can be generateddifferent interest distribution effects among different interest groups, and Russia’s centralbank does not have enough independence during the period of transition, so the interestgroups intend to influence monetary policy choice by their actions. Under this influence,the control of inflation has not been considered as the core goal in Russian transitionperiod. As a result, multiple monetary policy objectives have led to Russia’s inflationproblem very serious, and the high inflation rate has completely disordered economicenvironment and lost social welfare badly. With these considerations, the conclusioncomes out that multiple monetary policy objectives should be avoided, and anti-inflationshould be taken as the core objective of monetary policy in Russia.Nowadays，anti-inflation has been taken as the core of monetary policy by most ofthe central banks. In order to achieve this objective and to overcome the problem of timeinconsistency, the central bank usually selects a suitable monetary policy framework. Thecommon monetary policy frameworks are monetary targeting, exchange rate targeting,inflation targeting, and their applicability in Russia are discussed respectively in Chapter 5,6, and7.In Chapter5, the currency situation in Russia’s transition process is discussed.According to the relevant data, currency circulation is found turbulent at the beginning ofthe transition, which shows that the demand of currency fluctuates strongly. Thiscurrency demand is narrowed by the factors, such as initial high inflation, currencydevaluation and so on. In the recovery period, the currency demand is widened by theinfluence of alleviated inflation and the appreciation of exchange rate. By analyzing thetheoretical basis of the money supply targeting and applicability, the strong fluctuationsof currency demand make this policy framework not applicable in Russia’s transitionprocess.In Chapter6, exchange rates and currency movements in Russia’s transition processare analyzed. Russia’s dollarization and currency mismatch problem make the exchangerate stability to play an essential role in macroeconomic stability. Through the analysis ofthe implementation experience of the currency band, ever used in Russia, it is testifiedthat the stability of exchange rate is essential to ease inflation, while the exchange ratetargeting may bring financial risks.In Chapter7, the implementation characteristics and applicability of inflationtargeting in Russia are illustrated. So far, many transition countries have chosen inflationtargeting as their policy framework. Some referential experience can be found for Russiaby reviewing the implementation of inflation targeting in the Czech Republic andHungary. Although Russia may face some challenges when bring the policy frameworkinto force, the basic environment is getting ready. Moreover, some corresponding policysuggestions are also recommended to implement the inflation targeting in Russia.In Chapter8, the last chapter, the final conclusion is summarized after the wholestudy of monetary policy choice in Russia’s transition process. To the transition countries,it should be emphasized to improve the independence of the central bank, and to avoidthe interference from interest groups. Monetary policy should focus on maintainingmacroeconomic stability, especially by the means of anti-inflation. In order to achievethis objective, the appropriate monetary policy framework should be chose. At thebeginning of transition, exchange rate targeting is the most effective means, but it isvulnerable to be speculated. Therefore, either the currency board or totally dollarization can be implemented in small transition countries with highly opened market, whileinflation targeting should be considered to implement in big ones when they preparewell.