Fiscal impulse drives inflation in some Russian regions
The Central Bank of Russia (CBR) published a working paper quantifying the heterogeneous impact of fiscal impulse on inflation across Russian regions. The study found a significant pro-inflationary effect in regions with chronically high structural deficits.
Deficits fuel regional price hikes
This study quantifies the impact of fiscal impulse on inflation in Russian constituent territories, addressing a significant research gap at the regional level.
It proposes an adapted method for estimating the fiscal impulse, comparing a region's actual consolidated budget deficit from its own resources with a 'neutral' level.
This neutral level is calculated as the median deficit from 2017 to 2019, a period of macroeconomic stability.
The econometric analysis, using panel data for 85 Russian territories from 2020 Q1 to 2025 Q3, employed dynamic panel models estimated with the Arellano-Bond System GMM.
Results indicate a positive and statistically significant impact of the fiscal impulse on regional inflation's deviation from the countrywide rate.
Specifically, the pro-inflationary effect arises in regions with chronically high structural deficits (Clusters 1 and 3), while it is absent for regions with a neutral fiscal position (Cluster 2).
Expenditure structure matters
The study's main hypothesis posits that the fiscal impulse's impact is heterogeneous, depending on a region's fiscal position derived from a cluster analysis of structural deficits.
A second hypothesis explores how differences in expenditure structure contribute to this heterogeneity.
Regions with a higher share of social expenditures, such as wages and social benefits, exhibit a more pronounced inflationary response, as these directly stimulate consumer demand.
Conversely, capital expenditures have a more indirect impact, primarily affecting aggregate supply.
This suggests that understanding the composition of government spending is crucial for assessing its inflationary consequences at the regional level.
The findings have practical value for enhancing regional inflation forecasting and improving the effectiveness of monetary policy.
Beyond national averages
This paper provides crucial evidence that national fiscal policy assessments can obscure significant regional dynamics.
The findings underscore the need for tailored regional economic policies, acknowledging diverse fiscal positions and expenditure patterns.
For central banks, this heterogeneity implies that a uniform monetary policy might have uneven effects across a large, diverse country.