Inflation control and adequacy of targeting to economic growth policy

Abstract

The paper studies the relationship between inflation and economic growth. The subject of the research is the correlation between price dynamics and economic growth in the context of two main approaches – Fischerian and Schumpeterian – that describe such a relationship. The methodological and theoretical basis embraces the advances in the field of inflation of the neoclassical and Keynesian economic schools. The research method is the construction of an econometric model that allows identifying the effect of such a policy as inflation targeting. The study proves that in the Russian economy, there is no obvious relationship established between inflation and the product created, that is Fischer’s growth model, where inflation has to be suppressed to stimulate growth, is not justified. The developed analytical model of the relationship between inflation and the growth rate achieved when introducing a tough regulation – the targeting rule followed by monetary authorities – confirms that the targeting policy is indifferent to the ratio of aggregate supply and demand. Pursuing this policy can push up costs and heighten inflationary pressure. This method to control inflation is rather ineffective as the actions aimed at lowering inflation will produce the opposite effect fueling it. We conclude that, if targeting is used as a sort of anti-inflationary policy, the target should be altered to the situation and at least be put within certain limits to enable the economy to adapt to the dynamic change in the rest of its parameters.

Keywords

• inflation menegment
• economic growth
• fisher’s growth model
• schumpeter’s growth model
• inflation targeting
• aggregate demand
• aggregate supply
• recession