A Turkish website today published an article written by the prominent Russian economist Sergey Glazyev, after the Russian State Duma recently voted to approve the policy proposals presented by Central Bank of Russia Governor Elvira Nabiullina. We provide excerpts (based on a machine translation from the Turkish):
“Having listened to the report of the head of the Central Bank of Russia on `The main directions of the state unified monetary and credit policy,’ the majority of the members of the State Duma gave a frantic green light to their implementation, despite the following obvious conclusions:
“The economic recovery that started in recent years has been halted and we’ve fallen in the stagflation trap; the continued transfer of billions of dollars of capital out of the country; stagnation in the standard of living, the halting of the growth of real wages and incomes of the people; the bankruptcy of thousands of vital enterprises and the decline in production; and the reduction of investments and increasing technological backwardness of the economy….
“The claim that raising the policy rate is essential for reducing inflation is like the claim that a sick person should be put in a refrigerator to lower his body temperature. The results will be similar: the collapse of the organism…. Reducing demand is supposed to lead to a fall in prices: that’s what university students who learn the concept of market equilibrium textbooks say. Continuing the analogy with medicine, the action of the Central Bank can be compared to a doctor who cuts the tendons of a drunk with a hangover to stop his hands from shaking. The results are similar: work stops.
“The point is that, unlike the extremely simple models in microeconomics textbooks, a real economy is never in equilibrium, since new technologies and products emerge every minute, new businesses are established, and transactions are made that shift the hypothetical equilibrium point in uncertain directions. And raising the policy rate does not automatically lead to a fall in inflation: it may lead to a reduction in commodity production because of the need to repay increasingly expensive loans, or to the abandonment of investments aimed at increasing productivity for the same reasons.
“In this case, prices may also rise despite the contraction in demand.
