Inflation and economic growth in Russia: searching for the optimal level

This paper examines the nonlinear relationship between inflation and economic growth across Russian regions, contributing to the literature on the inflation-growth nexus by using subnational evidence from a large and economically heterogeneous country. Using panel data for 83 regions over the period 2015–2023, we estimate fixed-effects models with a quadratic specification of inflation. The growth-maximizing inflation rate and its confidence interval are derived using the delta method. The results provide robust evidence of an inverted U-shaped relationship between inflation and regional economic growth. The estimated threshold is 7.55%, which exceeds the Bank of Russia’s official inflation target of 4%. The estimated optimal range is broadly consistent with recent inflation dynamics. We test the robustness of our results by estimating semiparametric panel data models, models with Common Correlated Effects, and using instrumental variables. The findings suggest that the current inflation target may be conservative from a growth perspective. The paper contributes to the literature by providing regional-level evidence for Russia and by proposing an approach to jointly estimate the optimal inflation level and its confidence interval.