Optimal Inflation in Russia: Theory and Practice

Abstract

The article provides a comprehensive analysis of optimality of the Bank of Russia’s inflation target. It considers the theoretical framework of optimal inflation, international practice of inflation target setting, and econometric estimates. The paper summarizes the theoretical mechanisms of optimality of zero or positive inflation and concludes that there are a significant number of mechanisms leading to optimality of positive inflation in the literature. Further, the countries’ experience of inflation targeting is analyzed, and the value of the inflation target and the frequency of its revision in Russia, developed countries and emerging market economies are compared. The article also provides the authors’ estimates of optimal inflation based on the application of the panel threshold regression method for four groups of countries, including Russia, for the period 1990–2018: the largest emerging market economies; emerging market economies with export as a key source of income; post-Soviet countries; and countries of Central and Eastern Europe. The study provides some empirical evidence in favor of the optimal inflation rate varying from 3.5% to 4% for homogeneous samples of countries, including Russia. The results also show that low inflation (up to the threshold level equal to the inflation target in Russia) is associated with economic growth. The study concludes that the current inflation target in Russia is valid and provides some suggestions regarding further improvements of inflation targeting policy in Russia.