Did Russia avoid high unemployment with NGDP targeting?
By Scott Sumner
I’ve recently read a few articles that suggest the Russian economy is doing better than expected. The Economist attributes this success (or perhaps less failure than expected) to the adroit management of the head of Russia’s central bank:
Russia’s economy has been held back for years by corruption and rent-seeking, and more recently by Western sanctions and the low price of oil and gas, the country’s main exports. Yet the Central Bank of Russia (CBR) is a model of competent, technocratic policymaking. Since Ms Nabiullina became governor in 2013, the CBR has kept Russia’s economy, awful though it is, out of worse trouble.
Russia experienced a very severe real shock when the price of oil and other commodities plunged in 2014-15:
The recession might not appear to be all that severe, but note that these are quarterly growth rates; the annualized growth fell by 4 times as much, say from a trend of about 2% to negative 4%.
I was not able to find any data on NGDP growth, and would appreciate any help in that area. However it’s clear that a central bank that was targeting NGDP should have allowed inflation to increase sharply during the recession. That is, they should have done the exact opposite of what the Fed did, when it allowed inflation to fall during the severe 2008-09 recession. And it seems like the Russian central bank did exactly that:
A couple points need to be emphasized. The inflation data does not seem to exactly offset the change in RGDP growth. On the other hand, this is not the theoretically appropriate GDP deflator. I could not find quarterly data for the GDP deflator, but I suspect that this data would show the exact opposite problem from the CPI. Rather than overcompensating, the rise in the GDP deflator may well have under-compensated for the fall in RGDP. That’s because Russia devalued sharply during the recession—so the price of imported goods (in the CPI but not the deflator) would have soared, and the price of commodity exports (in the deflator but not the CPI) would have plunged.
In any case, elsewhere I’ve argued that total labor compensation is a better target than NGDP, for a country that is highly dependent on the export of commodities with volatile prices.
We do have one piece of evidence that monetary policy was effective, the unemployment rate:
It’s possible that this data is inaccurate, but note that unemployment did rise sharply during the 2009 recession. So Russia’s unemployment data is not like the Chinese data, which almost never changes. It’s interesting that unemployment only rose from about 5% to 6% during a very severe real shock to the Russian economy, whereas in 2009 it soared to over 9%
So how did Ms Nabiullina achieve this good labor market outcome?
The crisis of 2008-09, when oil prices fell and the world economy stagnated, revealed that the Russian economy was dependent on flighty foreign hedge funds and retail investors. As they pulled money out, the CBR tried to prop up the value of the rouble, losing over $200 billion of foreign-exchange reserves in a matter of months (see chart). Lending shrivelled across the economy. In 2009 GDP shrank by 8%.
. . .
To maintain reserves when the oil price began to fall, Ms Nabiullina accelerated a plan to allow the rouble to float. It fell by 40% against the dollar in 2015 alone. Propping up the rouble would have been popular, since it would have preserved ordinary Russians’ purchasing power, but it would have meant burning through the country’s reserves again. Instead the CBR channelled dollars to sanction-hit banks and energy companies, to help them repay external debt. Reserves have also been used to finance the budget deficit. As oil prices recover, so the CBR is again accumulating reserves, with a view to hitting the $500 billion mark once again.
So why is a sharp depreciation in the ruble to be preferred over the 2008-09 approach, which kept the ruble stable for a time? Didn’t the high inflation of 2015 reduce living standards? Ultimately living standards depend on production, which depends on employment. It does no good to preserve real hourly wages, if there are no jobs:
The rouble’s fall has stoked inflation, as imports have become more expensive. As a result, real (ie, adjusted for inflation) wages have fallen by more than 10% since 2014. (They are still triple what they were when Mr Putin took office in 2000.) Interest rates, which in 2014 were jacked up to 17%, have been the only tool the CBR has used to stem the rouble’s fall. High rates also help to bring down inflation, currently 7%, towards the CBR’s target of 4%. These decisions have “reflected the capacity of the institution to do what is right for the country regardless of the political situation”, says Birgit Hansl of the World Bank.
Such steps have been “painful, but necessary”, in Ms Nabiullina’s words.
This is what the Fed should have done in 2008-09. If the Fed had allowed inflation to rise slightly as RGDP slowed during the housing bust, then NGDP growth would have been more stable. Workers would have seen a reduction in real wages, but total employment would have been higher. With more people working, RGDP would have been higher, and since RGDP equals real income, Americans would have (paradoxically) had higher total real incomes, despite having lower hourly real wages.
Just to be clear, I don’t have good enough data to make any firm claims about the Russian economy. I doubt whether NGDP growth was completely stabilized (it probably fell somewhat) and in any case, I do not believe that that stable NGDP growth is the exact optimal solution for a commodity exporter like Russia. NGDP growth should slow somewhat when prices plunge in a big commodity exporting sector. But whatever they did, they ended up with the sort of countercyclical inflation you’d like to see, and the unemployment problem seemed to be much less than you’d expect after such a big real shock.
If Trump wins, maybe he should ask his good buddy Putin for some advice on monetary policy.
PS. Also recall that monetary policy is just one factor influencing an economy, and not the most important. Russia’s supply-side environment is still lousy:
Nonetheless, the long-term economic outlook is poor. Ms Nabiullina’s critics say the CBR’s tight monetary policy is the culprit, since it cripples investment. But corporate profits rose by 50% last year as the rouble value of foreign earnings jumped; companies have plenty of cash to invest. In regular surveys, manufacturers cite policy uncertainty, not high interest rates, as a big constraint. Ms Nabiullina agrees. “Our economic downturn is mostly the result of structural factors,” she says. What worries her most is not protracted low oil prices, but “how quickly and dynamically” Russia can improve its business environment. Until then, the CBR will have an outsize role in keeping the Russian economy going.
Update: I found some NGDP data at the IMF, but unfortunately only annual data. In the 2008-10 period NGDP growth fluctuated wildly, from 24.1% in 2008 to minus 6.0% in 2009 to 19.3% in 2010.
This time around things were more stable. NGDP growth slowed from 9.6% in 2014 to 3.2% in 2015, to a predicted 5.8% in 2016. Whereas RGDP plunged by 7.8% in 2009, it only fell by 3.7% in 2015. As I indicated, it is appropriate for there to be some NGDP slowdown in a commodity exporting country, when global commodity prices plunge. Thus the NGDP numbers for 2014-16 don’t look all that bad to me. I wonder how total labor compensation did over this period? I suspect that variable was even more stable.