Macroeconomics in Russia

Russia faces macroeconomic problems, an apparently calamitous fall in output and high and variable inflation, along with the microeconomic problems of reform and transition to a market economy. We survey the numbers, and conclude that the fall in output, though real, is much less than often supposed. We find reasons for the fall in output in disruptions to the credit and payment systems as they were partially liberalized, excacerbated by a shock to inter-republic trade. The fall in output from these sources is not a necessary part of the transition to market economy, it was avoidable, and steps can be taken to make sure it is not repeated. We stress the link between inflation and the present-value government budget. Declining tax revenues and increasing arrears make us suspicious that the current declines in inflation may not last. Finally, we discuss the conundrum of making policies like a hardening of budget constraints believable, so that firms will act o