Hello guys! So many exciting things are happening these days...
The Russian Central Bank raised interest rates to deal with the uncomfortable level of inflation in their country. The idea: higher interest rates will discourage investment and encourage savings, thus discouraging consumption as well. This will lead to lower Aggregate Demand and thus lower prices.
Now... That's all nice and completely consistent with Economic theory but it's a ridiculous policy in the context Russia is in. Contractionary monetary policies are great in times of inflationary gaps because they will slow down an overheating economy. Russia is Definitely NOT in that situation.
The high levels of inflation at the moment (and for the near future) come from sanctions from Europe and the USA coupled with the inability of Russian producers to compensate for the loss in imports. The less productive and/or smaller Russian businesses trying to replace some of these losses, added to the weaker currency, is the most likely cause of this inflation. Slowing down the economy even further (they clearly seem to be in a recessionary gap at the moment) is obviously not the right strategy. Classical policies aimed at increasing productivity and decreasing the inefficiency of the government would work much better in this case.
We are surrounded by incompetent economists and politicians... I wonder where they learnt Economics sometimes, Not from my classes that's for sure ;o)
As a side note, Argentina's Central Bank's chief resigned (or more likely was forced to resign) a few days ago. He engaged in the same type of contractionary policy mentioned above (the right thing to do there) in order to control Argentina's inflation. He had to leave because everyone obviously knows that there is no inflation problem in Argentina (sarcasm here)... or so says the government.
Hi Guys. We are the 18th of December and the Russian Central bank is thinking of increasing its interest rates even more in order to reduce the level of inflation in the country. The first attempt failed, as I (and many other Economists) predicted and I foresee that this attempt will also fail, giving that nothing else big will happen. I expect the only thing this will do is to choke off even more the Russian Economy. It seems that the Russian government (read here: Putin) will need to wake up to the fact that they are running an underdeveloped country that, although it was very powerful in the past, needs to be more sensitive to opinions of the international community.