Inflationary Handicap Of The Monetary Transmission Mechanism: Evidence From Russia

The paper is devoted to the analysis of impulses summoned by shifts in Russian economy's money supply. We catch the shocks outgoing to primal elements of gross domestic product, i.e. consumption of goods and durables, capital investment, public expenditures and net export. Using VEC model we unravel long- and short-term relationship between money supply and the GDP components finding that in the short term the transmission effect is reversed. Monetary expansion creates critically high level of inflationary expectations, which, via Hicks income effect, hampers major macroeconomic aggregates and impedes the development of raw-based economies. The long-term relationship is consistent with the theory of monetarism, compelling monetary authorities to refrain from excessive regulatory functions.