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

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.