Money Supply-Inflation Relationship in Postcommunist Russia

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