“Honest” inflation is better for the economy than multiple exchange rates

The plurality of exchange rates and their manipulation by the state for fiscal purposes is not an effective policy in comparison with the alternative – pro-inflationary budgetary policy. Nevertheless, according to economists at Columbia University, who have studied a very popular issue in developing countries, inflation, which destroys national assets less than currency “games”, is more attractive as an object of struggle for the common good.

Most of the work of economists on “multiple rates” of currencies dates back to the 1980s. That is why the preprint of, apparently, the final work on this topic for the next few years, by two economists from Columbia University in the United States, who have devoted about 30 years to the topic – Martin Uribe and Stephanie Schmitt-Grohe, is interesting and important. tax policy”: in it they bring together into a single theory and model the previously described particular aspects of this problem, which was relevant for the Russian Federation 20 years ago. According to 2019 estimates, the systems of “parallel”, dual and multiple exchange rates are used by about a fifth of the world’s economies, mainly countries with high inflation and large budget deficits – in the Russian Federation, the “multiple exchange rate” as an idea was no longer discussed mainly following the results of budget resolution . Spouses Uribe and Schmitt-Grohe in different years dealt with the influence of “multiple exchange rates” on export markets, labor markets, prices. In this paper, they analyze what is for governments the main rationale for such a fiscal policy: the multiplicity of rates is a de facto way of non-inflationary financing of budget deficits, an alternative to pro-inflationary strategies.

Martín Uribe, who spent four years in the US during his academic career on the Board of the Fed, is an American economist of Argentine origin, and one of the goals of the publication is to analyze the possible development of events in Argentina, a country that has been maneuvering between the two strategies for decades. Uribe and Schmitt-Grohe demonstrate that if it were only the economic motivations of governments, there would be no choice. Calculations show (confirming the conclusions of most of the works of predecessors) that “plurality of course” as a strategy is always a losing choice if the goal of the “extended government” in the country is to preserve and increase national wealth. In theory, the “exchange tax”, which is usually implemented either as a specialized (through compulsory exchange rates for different categories of participants in foreign economic activity) taxation of imports, or as a basis for foreign trade monopolies, is quite suitable for suppressing inflation in the national economy and in many cases fully and stably solve the problem of the budget deficit. That is, in itself, the choice in favor of “multiple courses” is possible and not a mistake. Nevertheless, under any circumstances, a single exchange rate and higher inflation, Uribe and Schmitt-Grohe confidently argue, are the right choice: if for some reason (not discussed in the text, usually domestic) it is impossible to switch to standard inflation targeting or the currency board regime ( both versions were undertaken in Argentina), the losses of national welfare from the “multiple course” are always higher and will be higher – it not only has more “side effects” (smuggling, corruption, problems with the allocation of resources), but also more destructive power in relation to the economy in comparison even with high inflation. Finally, in the description of the authors, the model works unequivocally: the “multiple rate tax” works best for its stated goals (reducing the budget deficit with stable inflation) when it is close to zero, that is, in a single rate situation.

Why is the “multiple course” of the governments of troubled countries chosen so often? Uribe and Schmitt-Grohe give a simple but very probable explanation: inflation is more “visible” and understandable to the voter than the long-term “wealth destruction” in the economy, which is not directly felt by anyone in a few years – for the democratic government, the fight against it in the medium term is politically more beneficial.

Dmitry Butrin