I n t h I s c h a p t e r y o u w I l L

R u s s i a ’s N e w L e a d e r s P l a n t o P a y
D e b t s b y P r i n t i n g M o n e y
B
Y
M
ICHAEL
W
INES
M
OSCOW
—Russia’s new Communist-
influenced Government indicated today
that it plans to satisfy old debts and bail
out old friends by printing new rubles, a
decision that drew a swift and strong re-
action from President Boris N. Yeltsin’s
old capitalist allies.
The deputy head of the central bank
said today that the bank intends to bail
out many of the nation’s bankrupt finan-
cial institutions by buying back their
multibillion-ruble portfolios of Govern-
ment bonds and Treasury bills. The Gov-
ernment temporarily froze $40 billion
worth of notes when the fiscal crisis
erupted last month because it lacked
the money to pay investors who hold
them.
Asked by the Reuters news service
how the near-broke Government would
find the money to pay off the banks,
the deputy, Andrei Kozlov, replied,
“Emissions, of course, emissions.”
“Emissions” is a euphemism for printing
money.
Hours later in Washington, Deputy
Treasury Secretary Lawrence H. Sum-
mers told a House subcommittee that
Russia was heading toward a return
of the four-digit inflation rates that sav-
aged consumers and almost toppled Mr.
Yeltsin’s Government in 1993.
Russia’s new leaders cannot repeal
“basic economic laws,” he said.
S
OURCE
:
The New York Times,
September 18, 1998,
p. A3.
I N T H E N E W S
Russia Turns to
the Inflation Tax

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6 4 0
PA R T T E N
M O N E Y A N D P R I C E S I N T H E L O N G R U N
For example, if the bank posts a nominal interest rate of 7 percent per year and the
inflation rate is 3 percent per year, then the real value of the deposits grows by 4
percent per year.
We can rewrite this equation to show that the nominal interest rate is the sum
of the real interest rate and the inflation rate:
Nominal interest rate 
Real interest rate 
Inflation rate.
This way of looking at the nominal interest rate is useful because different eco-
nomic forces determine each of the two terms on the right-hand side of this equa-
tion. As we discussed in Chapter 25, the supply and demand for loanable funds
determine the real interest rate. And, according to the quantity theory of money,
growth in the money supply determines the inflation rate.
Let’s now consider how the growth in the money supply affects interest rates.
In the long run over which money is neutral, a change in money growth should
not affect the real interest rate. The real interest rate is, after all, a real variable. For
the real interest rate not to be affected, the nominal interest rate must adjust one-
for-one to changes in the inflation rate. Thus, 
when the Fed increases the rate of money
growth, the result is both a higher inflation rate and a higher nominal interest rate.
This
adjustment of the nominal interest rate to the inflation rate is called the