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Development of the monetary policy of Russia

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The development of monetary policy of Russia was mainly influenced by overall situation and key problems of the economy. In this regard one can identify the following different stages: formative period (1992-1994), attempts of macroeconomic stabilization (1995-1998), the period between crises of 1998 and 2008-2009 and subsequent period main trends of which eventually led to inflation targeting. Formative period coincided with the most difficult period of economic restructuring with financing of immense general government deficit, struggling against liquidity shortages in the face of high inflation and departure of Russian monetary system out from the former ruble zone being immediate concerns of the Bank of Russia. In 1995-1998 extremely tight monetary policy was used to manage inflationary pressures, however, along with overvalued ruble and government budget failure such policy aggravated economic fluctuations and ended up with the onset of the crisis. At the beginning of 2000s fundamentally different macroeconomic situation was characterized by favorable external environment, positive balance of payments, overstated foreign currency exchange rate and public debt settlement – these drivers facilitated rapid recovery. In these circumstances monetary policy was refocused towards the slowdown of ruble strengthening: maintaining overstated currency exchange rate by means of the systematic currency interventions (and, thus, contributing to price competitiveness of Russian companies) the Bank of Russia tried at the same time to restrain inflation by sterilization of excess money (main pressure of sterilization process was actually put upon the budget through reserving oil and gas extra revenues). Possibilities of this quite contradictory model had been used up even before the unfolding of the global crisis, however, decisive changes to the policy were undertaken under the following conditions and trends of the post-crisis period: stabilization and subsequent decline in oil prices, slowdown of economic growth and structural problems of the Russian economy, fundamentally new situation in the foreign currency exchange market, consistent structural liquidity shortage, etc. As a result the Bank of Russia adopted the approach of inflation targeting including the rejection of control over "floating" exchange rate.

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