Money Supply, Inflation and Budget Deficit in Russia Compared to the United States

Abstract

The author examines the causes and sources of the depreciation of money in Russia compared with that in the United States. The subject is causal connections between the budget deficit, money supply, and the depreciation of money. The relevance of the research for Russia is determined by concerns about macroeconomic stability and high inflation. In the case of the United States, an increase in the money supply and an inflation spike occurred because of the debt financing of the federal budget deficit. The scientific novelty of the paper lies in considering the two main options for monetary policy to support the liquidity of public debt: hard and soft, and the analytical methods and results of the research. One of the important scientific results is that the burden of public debt should be measured not as the ratio of public debt to gross domestic product (GDP) but as the share of public debt in a bond market. The second scientific result is very important for the practice: during 2011–2022, in the eight biennial periods, the GDP deflator was approximately equal to the growth of the money supply M2 minus GDP growth. Thus, the depreciation of money was directly caused by monetary policy. In the other three biennial periods, a substantial difference was observed, probably because of external shocks. As the method of the study, the author estimated the effect of interest rates caused by crowding out corporate debt by public debt. It was substantiated that to obtain the effects of soft monetary policy and thus the increase of M2 to GDP deflator, it is essential to use biennial periods. Based on the results of the analysis, it was revealed that, particularly in 2021–2022, the growth of the GDP deflator amounted to 139.8% and was due to the growth of the money supply M2 by 140.5%. At the same time, the effect on GDP growth was insignificant, at 3.4%. The key conclusion is that for the implementation of macroeconomic stability policies, it is necessary to manage the expansion of the M2 money supply, the exchange rate, and to use the GDP deflator as an important indicator in addition to the inflation index — consumer price index. A good way to achieve this is to adopt a special law for controlling inflation, similar to the USA Inflation Reduction Act.