The relationship between emission and inflation in the long term: a theoretical analysis

This paper presents new research results in the field of switching reproduction theory and related mathematical models, which have been conducted at the Institute of Economics of the Russian Academy of Sciences since 2011. The peculiarity of the switching mode of reproduction models is that they explicitly model the interaction of the financial and real sectors of the economy, and the country’s economy itself is not disaggregated by industry (mechanical engineering, agriculture, services, etc.), but by time, when the object of research is production subsystems that differ from each other in the age of fixed capital.
One of the mathematical difficulties of working with such models is the difficulty of obtaining analytical dependencies. This paper shows that for a special case of balanced economic growth in the long term and a continuous set of production subsystems, it is possible to obtain analytical expressions that allow a better understanding of the impact of monetary policy on economic dynamics in the long term. The main result is that the long-term “GDP rate/inflation” relationship significantly depends on how the emission flows are distributed between the investment and consumer circuits of monetary circulation. Monetary authorities should actively participate in this distribution. In this regard, the issue of a new approach to the problem of the key interest rate is being raised, namely, to strengthen its impact on the long-term aspects of monetary policy. The authors propose to divide the single key rate into two components: the investment rate, which is to be used in the case of lending to investments in fixed assets and affects the long-term expectations of investors, and the non-investment rate (for milestones in other situations). If we leave aside the experience of the USSR, where there were several bets of this kind, the proposed idea is of a pioneering nature. It needs to be discussed. So far, one thing is obvious: the current practice of managing a single key rate is ineffective. This practice needs to be changed.