Inflation Targeting Isn't Everything

An IMF Set-Up, or What Should Nabiullina Do Now?

The International Monetary Fund (IMF) has published the results of its study: inflation targeting, which for decades it considered a universal price stabilization tool, doesn’t work everywhere and always. These findings are contained in the IMF report “How Inflation Was Managed in 2022: A Comparative Analysis of Inflation-Targeting and Non-Targeting Central Banks.”

The Finintern’s monetary doctrine has been recognized by its flagship financial institution (the IMF) as non-universal. It turns out that despite strictly following IMF directives (decisive interest rate hikes), central banks with inflation targeting regimes have not achieved statistically significantly better performance than their counterparts who pursued a much more relaxed monetary policy.

It has suddenly become clear that inflation is caused not only by overheated demand, as the head of the Central Bank of Russia has been telling us for years, but also by external factors such as military conflicts, collapse and instability of energy prices, disruption of supply chains, and so on. Who would have thought?! And if they had known about the non-monetary nature of inflation: the arbitrary actions of natural monopolies or unpredictable non-tax revenues…

I wonder if the head of the Central Bank of Russia will be consistent in her actions, always and completely following IMF recommendations? Will she lower the key rate to at least 5% (even in 2-3 stages) in order to boost production and thus reduce inflation? I think it’s unlikely.

The Bank of Russia transitioned to inflation targeting in 2015. So now we have to admit that the Central Bank has been using primitive mechanical models for the past 10 years simply because that was the IMF’s recommendation? To which, incidentally, the Russian Federation has long since ceased to owe anything.

And admit that illiberal economists have been pointing all these years to the correct approach to developing a sovereign economy through a soft monetary policy, accompanied by investment in the real sector of the economy and, consequently, an increase in the supply of goods and services?