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MACROECONOMICS

CONTINUOUS INTERNAL ASSESSMENT-3

MONETARY POLICY AND

ITS IMPACT ON ECONOMY, INFLATION AND
EMPLOYMENT

GROUP MEMBERS :

Deepanshi Singh (2023656)

Anushka Raj (2023654)
Manik Bansal (2023622)
Mohammad Amaan (2023625)
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Table of Contents

Serial Topic Page

number Number

1 Country of choice, Various government policies 3

2 Monetary policy of Russia 4

3 Economy 5

4 Inflation 6

5 Employment 7

6 Conclusion and References 8

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Country of choice - The Russian Federation

INTRODUCTION

About the country

The Russian Federation, also known as Russia, is a nation that spans Eastern Europe and
Northern Asia. It is the world's largest nation, occupying 17,125,191 square kilometers and
accounting for more than one-eighth of all inhabited land. Russia's population is extremely
diverse. The majority of Russians live in the European part of the country, especially in the
fertile region surrounding Moscow, the capital. Within its boundaries, most, if not all, of the raw
materials needed by modern industry can be found. The ruble is Russia's monetary unit, and it is
now openly convertible, marking a significant divergence from the tradition of artificial
exchange rates and tight restrictions.
Russia's monetary unit is the Ruble, which is now easily convertible, a significant deviation
from the Soviet era's tradition of artificial exchange rates and tight restrictions. The Russian
Central Bank (RCB), which replaced the Soviet-era Gosbank, is solely responsible for the
country's monetary system regulation. The bank's primary goal is to safeguard and stabilize the
ruble, which it accomplishes by foreign exchange regulation.

What are the various government policies?

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The government uses financial policies in order to control the economy and protect it from
hyperinflation or an economic depression. There are two types of financial policies that the
government usually uses:

Monetary Policy
It is the framework created by a country's monetary authority to regulate either the
interest rate payable for very short-term borrowing (banks borrowing from each other to
meet their short-term needs) or the money supply, usually in an effort to minimise
inflation or the interest rate, in order to ensure market stability and general confidence in
the value and stability of the country's currency.

Fiscal Policy
Fiscal policy is the framework by which a government changes its spending and tax rates
in order to monitor and control the economy of a country. A central bank controls a
country's money supply through this strategy, which is similar to monetary policy. These
two policies are used in a variety of situations.

MONETARY POLICY OF RUSSIA

The Central Bank of Russia (Bank Rossii), in accordance with the Russian Constitution and
Federal Law, has many responsibilities, including maintaining the value and stability of the
ruble, overseeing Russian financial institutions and managing Russia's foreign reserves, foreign
exchange, and setting short-term interest rates.

The Board of Directors of the Russian Federation's Central Bank decreased the key interest rate
by 25 basis points to 6.00 percent on February 7, 2020, which was the lowest level since January
2014. The key rate is the interest rate on the central bank's loans to commercial banks and the
deposits it receives from them. The step, which was the Bank's sixth in a row since easing
monetary policy in June 2019, was prompted by declining inflationary pressures and stagnant
development in economic activity. In February, the Bank's tone shifted to more pragmatic,
reversing previous guidance that indicated it would possibly pause monetary policy easing in the
first half of the 2020. As a result, the CBR kept its GDP growth rate forecast for 2020 unchanged
at 1.5 percent to 2.0 percent, assuming that the “national projects” program was implemented
successfully.
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Russia's macroeconomic performance had been outstanding until the global economic crisis hit
in 2008. The GDP increased by 70% between 2000 and 2008. In 2008 and 2009, however, GDP
dropped by more than 8%, fixed investment fell by 17%, inflation grew to 12%, and
unemployment increased to 8%.

Impact of monetary policy on:

1. Economy

The global economy has entered its worst recession since World War II as a result of the
COVID-19 pandemic. Despite substantial policy support, global GDP is expected to contract by
5.2 percent in 2020, followed by a 4.2 percent recovery in 2021. The Russian government
announced an economic aid package worth USD 18.3 billion at the end of March to combat the
effects of the Covid-19 pandemic.

COVID In the fourth quarter, the European union – Russia's largest trading partner – saw a sharp
increase in cases, threatening the nascent economic recovery as authorities in several countries
maintained, reintroduced, or tightened pandemic-control measures.

Social measures implemented earlier this year, such as a rise in the overall level of
unemployment insurance and a number of family payments and pension benefits, are
compensating for the crisis's extreme effects on jobs and disposable incomes.
The crisis, however, has increased unemployment in all regions, with the majority of job losses
concentrated in only a few economic activities like manufacturing, construction, retail and
hospitality services.

Given Russia's relatively low public debt, sizable reserves, and the anticipated presence of a
negative production deficit, It is believed that Russia has some room to allow for a more gradual
expansion. Russian regions have been affected to varying degrees, depending on their level of
exposure to the pandemic, pre-existing conditions, and the form of regional activity.

However, at the current rate of adjustment, regional transfers are expected to fall by more than
10% in 2021-2022, relative to the pre-pandemic period of 2017-2019. A more relaxed pace of
transition would allow for further rises in social care funding as well as real-term support to
regions before the crisis passes.
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The monetary stimulus, which amounts to just 1.2 percent of national GDP, is primarily aimed at
assisting households and small and medium-sized businesses as the virus epidemic worsens.
Because of the economy's relative exposure to external shocks as a result of years of Western
sanctions, as well as its large cash reserves, Russia is in a reasonably strong position to survive
the global economic slowdown.

2. Inflation

The Central Bank of Russia, founded in 1990, has several functions which it performs in
compliance with the Russian Constitution and Russian Federal Law: maintaining the value and
stability of the ruble, overseeing Russian financial institutions (including acting as a lender of
last resort), managing Russia’s foreign reserves and foreign exchange, and setting short-term
interest rates, which is one of the main instruments of the bank’s monetary policy
implementation.

The Main instrument of the Monetary Policy of Russia is the Key Interest Rate. The key rate is
the interest rate on loans extended to commercial banks by the central bank and on deposits it
accepts from them. A change in the key rate impacts demand through interest rates in the
economy and, ultimately, inflation. The goal of Bank of Russia’s monetary policy is to maintain
the key interest rate close to 4%.

With respect to the pandemic, the oil prices fell by 35% and the country suffered a lock down
which had a negative impact on the economy. As a result, the inflation in the economy was on a
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rise and the government had increased the key interest rate to control inflation in the country.
The government also stopped fiscal-rule-related foreign exchange currency purchase to limit any
further trouble depreciation as it would lead to the loss of the foreign exchange reserves of the
country.

Over the years, banking has become nationalized in Russia and Private Banks feared that they
might have to exit the market in the next 10-15 years. This was done due to poor corporate
governance practices, money laundering and Western sanctions. In 2017 alone, the Bank of
Russia spent more than $40 billion bailing out three major lenders. Therefore, the Government
started cleaning up the banking sector by withdrawing licenses of banks which had no or very
little effect on the financial market and the overall GDP of the country.

3. Employment

The economic conditions in Russia were severely affected after the GDP shrank at the
sharpest rate of the decade, in Quarter 2. However, they seemed to improve somewhat in
Quarter 3 and the economic activity fell at a much slower pace than quarter 2 since it was
supported by a recovery in the industrial sector as manufacturing firms continued to
improve productivity. Moreover, the ease of the pandemic restrictions in the later months
seemed to have boosted household (consumer) spending.
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However, the turnaround was likely offset by a weaker ruble and an increasing
unemployment rate. Externally, things were looking bleak: Merchandise exports
continued to fall in July–August, owing to limited domestic oil production and low global
crude prices. In Q4, deteriorating private sector conditions and a surge in new Covid-19
cases threatened to derail the recovery's fragile foundation.

According to Rosstat, Russia's unemployment rate in November 2019 was 4.8 percent.
When evaluating this very low figure, keep in mind that a substantial portion of Russia's
labor force is paid at the minimum wage, which is well below the official subsistence
standard. Experts feared that, as the first line of defence against the coronavirus (COVID-
19) pandemic, social distancing would result in job losses in Russia in 2020. As a result,
the most feasible employment reduction rate of between 10% and 15% might have
resulted in five to eight million people losing their jobs across the world.

Conclusion

Monetary policy is used by a country's Federal Reserve to control economic growth,

unemployment, and inflation. It does so in order to have an effect on productivity, costs, demand,
and jobs. Thus, controlling inflation, balancing employment levels, and sustaining long-term
interest rates are the three goals of monetary policy.
From the inferences of this assignment, it can be concluded that the main factor of the monetary
policy of Russia in the year 2020 was reducing the key interest rate by 25 basis points to 6%.
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Changes in the monetary policy in order to expand the Aggregate Demand, can be done either by
increasing the money supply or lowering the interest rate. As interest rates fall, the investment
spending is stimulated and people tend to invest more money. Thus, it increases the aggregate
demand in the short run.

References

1. FocusEconomics. (2014, January 2). Russia Economy - GDP, Inflation, CPI and Interest

Rate. FocusEconomics | Economic Forecasts from the World’s Leading Economists.

https://www.focus-economics.com/countries/russia

2. FocusEconomics. (2020). Russia Fiscal Balance - Russia Economy Forecast & Outlook.

FocusEconomics | Economic Forecasts from the World’s Leading Economists.

https://www.focus-economics.com/country-indicator/russia/fiscal-balance

3. Russia Economic Report. (2020). World Bank.

https://www.worldbank.org/en/country/russia/publication/rer

4. BTI 2020 Russia Country Report. (2020). BTI Blog.

https://www.bti-project.org/en/reports/country-report-RUS-2020.html#pos14

5. (“Unemployment, Total (% of Total Labor Force) (National Estimate) | Data”)

https://data.worldbank.org/indicator/SL.UEM.TOTL.NE.ZS?

end=2020&start=2020&view=bar

Division of work
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Introduction - Mohammad Amaan (2023625)

Impact on Economy - Anushka Raj (2023654)

Impact on Inflation -Manik Bansal (2023622)

Impact on Employment and Conclusion - ‌Deepanshi Singh (2023656)