I have been reading about possible solutions to Russia's financial
woes. One solution calls for the use of the dollar as a medium of exchange
along with the ruble. What impact does this have on U.S. monetary policy?
First of all, it's important to keep in mind that Russia's total money
supply is really small compared with America's. A quick glance at last
year's data shows that Russia's money supply was only about 3% as large
as America's. And that was calculated at official exchange rates--an iffy
way of calculating things. Despite the immense size of Russia, its economy
is pretty small.
So, use of the dollar in Russia might well have some effects on U.S.
open market operations, but no matter which theory you buy, the effects
would probably be pretty small.
There are different ways that a country can "use" the dollar. Certain
countries, such as Liberia and Panama, have pretty much used the dollar
in place of a national currency. U.S. currency circulates from hand to
hand in these countries. If the Russians actually began using U.S. paper
money (and plenty is already there and elsewhere), then this would in
theory affect the relationship between the quantity of U.S. money and
the level of U.S. prices. The quantity of U.S. currency in circulation
would increase, but this increase would not place direct pressure on U.S.
prices to rise (because these dollars would be held outside the U.S. by
foreigners). There are some indirect paths back to U.S. prices, but I
won't get into them.
Another possibility would be for the Russians to establish a currency
board (like Argentina's) where the Central Bank's reserves would consist
of deposits in the U.S. banking system, and rubles would be restricted
to some multiple of those deposits (perhaps one-for-one). These Russian
deposits would affect the U.S. monetary base. Therefore, the Fed would
want to track these numbers and, potentially, to incorporate them into
the conduct of monetary policy.
Since U.S. monetary policy is currently based around interest rates and
not around the monetary base, though, it's unlikely that Russia's monetary
situation would affect our monetary policy a great deal. No matter how
much Russian monetary aggregates bounce up and down, they're not likely
to have much effect on U.S. interest rates. But, in theory they could
have some effects, so they would be watched.
One final note: For Russia to go to a dollar-based economy, they'd need
to have some means of buying the dollars in the first place. They certainly
couldn't buy any more dollars than the dollar equivalent of their
current money supply. And in reality, they could only buy a fraction of
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