№ 9/2019

Fìnansi Ukr. 2019 (9): 111–126https://doi.org/10.33763/finukr2019.09.111

MONETARY POLICY

KHOKHYCH Dmytro ¹

¹Kyiv National Economic University named after Vadym Hetman
OrcID ID : https://orcid.org/0000-0003-3787-939X

Mechanism of interaction of inflation targeting and economic growth in Ukraine

The article studies the interaction mechanism of inflation targeting and economic growth in a mid-term perspective. The potential channels of this influence are analyzed as well as modern economic studies testing their performance. The effects of the various options for implementing inflation targeting in countries targeting inflation are compared. On the example of Ukraine, the reliability of the hypothesis of inflation reduction, price level volatility through the inflation expectations channel is tested, which confirms the endogenous nature of the decision of the National Bank for a gradual transition to the inflation-targeting regime. Inflationary expectations of economic agents have a positive effect on the dynamics of real output if they are confident that the monetary authorities will achieve inflation targets. The high volatility of inflation, in contrast, contributes to uncertainty, which leads to higher costs for firms and higher prices. This, in turn, makes borrowed funds more expensive and reduces investment. This hypothesis is also confirmed in developing countries, where the institutions of monetary authorities are highly dependent on political power. The necessity of increasing the attention of the monetary authorities to the exchange rate channel of the transmission mechanism of monetary policy and the gradual de-dollarization of the economy as a negative factor in influencing the inflation rate in Ukraine is indicated. Despite the specifics of money transmission channels in dollarized economies, which are mainly developing countries, the use of inflation targeting introduces positive signals for economic entities. The use of a mixed inflation-targeting regime, including free currency exchange rate formation, made it possible for the central bank to achieve the planned inflation target level. This suggests that the implementation of the inflation targeting policy has been successful under the conditions of soft pegging to the exchange rate. Based on the analysis, recommendations are formulated for choosing the optimal strategy for economic growth of the monetary policy regime in Ukraine.

Keywords:inflation targeting, economic growth, inflation expecting, monetary policy, currency rate, prices stability

JEL: E31, E52, E58

KHOKHYCH D. . Mechanism of interaction of inflation targeting and economic growth in Ukraine / D. . KHOKHYCH // Фінанси України. - 2019. - № 9. - C. 111-126.

Article original in Ukrainian (pp. 111 - 126)

Download

Downloads :357

1. Sheridan, N., Ball, L. (2005). Does inflation targeting matter? In B. S. Bernanke, M. Woodford (Eds.). The inflation targeting debat (pp. 249-276). Chicago: University of Chicago Press for the National Bureau of Economic Research.

2. Walsh, C. E. (2009). Inflation targeting: What have we learned? International Finance, Vol. 12, No. 2, 195-233.
doi.org/10.1111/j.1468-2362.2009.01236.x

3. Fang, W., Miller, S., & Lee, C. (2009). What can we learn about inflation targeting? Evidence from time-varying treatment effects. University of Connecticut Working Paper, 14R.

4. Brito, R., Bystedt, B. (2010). Inflation targeting in emerging economies: Panel evidence. Journal of Development Economics, Vol. 26, No. 3, 519-532.

5. Hu, Y. (2003). Empirical investigations of inflation targeting. Institute for International Economics Working Paper, 03-06.
doi.org/10.2139/ssrn.515002

6. Mollick, A., Cabral, R., & Carneiro, F. (2011). Does inflation targeting matter for output growth? Evidence from industrial and emerging economies. Journal of Policy Modeling, Vol. 33, No. 4, 537-551.
doi.org/10.1016/j.jpolmod.2011.03.010

7. Kurihara, Y. (2013). Does adoption of inflation targeting reduce exchange rate volatility and enhance economic growth? Journal of World Economic Research, Vol. 2, No. 6, 104-109.
doi.org/10.11648/j.jwer.20130206.11

8. de Guimaraes e Souza G. J., de Mendonca H. F., & de Andradec J. P. (2016). Inflation targeting on output growth: A pulse dummy analysis of dynamic macroeconomic panel data. Economic Systems, Vol. 40, No. 1, 145-169.
doi.org/10.1016/j.ecosys.2015.06.002

9. Ayres, K., Belasen, A., & Kutan, A. (2014). Does inflation targeting lower inflation and spur growth? Journal of Policy Modeling, Vol. 2, No. 36, 373-388.
doi.org/10.1016/j.jpolmod.2012.12.008

10. Kartaev, F. S. (2017). Is inflation targeting useful for economic growth? Economic issues, 2, 62-74 [in Russian].
doi.org/10.32609/0042-8736-2017-2-62-74

11. Hale, G., Philippov, A. (2015). Is transition to inflation targeting good for growth? FRBSF Economic Letter, 2015-14.

12. National Bank of Ukraine. (2018). On the monetary policy strategy of the National Bank of Ukraine (Decree No. 37-pd, July 13). Retrieved from zakon.rada.gov.ua/laws/show/vr037500-18 [in Ukrainian].

13. Verkhovna Rada of Ukraine. (1999). On the National Bank of Ukraine (Act No. 679-XIV, May 20). Retrieved from zakon.rada.gov.ua/laws/show/679-14 [in Ukrainian].

14. Hrytsenko, A. A., Krychevska, T. O., & Petryk, O. I. (2008). Inflation targeting institute: foreign experience and implementation prospects in Ukraine. Kyiv: NAN Ukrainy, Instytut ekonomiky ta prohnozuvannia [in Ukrainian].

15. Mishkin, F. S. (1998). The economics of money, banking and financial markets. Kyiv: Osnovy [in Ukrainian].

16. Leiderman, L., Maino, R., & Parrado, E. (2006). Inflation Targeting in Dollarized Economies. IMF Working Paper, 06/157.
doi.org/10.5089/9781451864175.001

17. Eggo, J., Khan, M. (2014). On the nonlinear relationship between inflation and economic growth. Research in Economics, Vol. 68, No. 2, 133-143.
doi.org/10.1016/j.rie.2014.01.001

18. Ibarra, R., Trupkin, D. (2016). Reexamining the relationship between inflation and growth: Do institutions matter in developing countries? Economic Modelling, Vol. 52, Pt. B, 332-351.
doi.org/10.1016/j.econmod.2015.09.011

19. Sarel, M. (1996). Nonlinear Effects of Inflation on Economic Growth. IMF Staff Paper, 43, 199-215.
doi.org/10.2307/3867357

20. Fischer, S. (1994). The Costs and Benefits of Disinflation. In Framework for Monetary Stability (pp. 31-42). London: Kluwer Academic Publishers.
doi.org/10.1007/978-94-011-0850-8_4

21. Bruno, M., Easterly, W. (1994, November). Inflation Crisis and Long-Run Growth. World Bank.
doi.org/10.3386/w5209

22. Wilson, B. (2006). The links between inflation, inflation uncertainty and output growth: New time series evidence from Japan. Journal of Macroeconomics, Vol. 28, No. 3, 609-620.
doi.org/10.1016/j.jmacro.2004.11.004

23. Neanidis, K., Savva, C. (2013). Macroeconomic uncertainty, inflation and growth: Regime-dependent effects in the G7. Journal of Macroeconomics, Vol. 35, No. C, 81-92.
doi.org/10.1016/j.jmacro.2012.10.005

24. Bhar, R., Mallik, G. (2010). Inflation, inflation uncertainty and output growth in the USA. Physica A: Statistical Mechanics and Its Applications, Vol. 389, No. 23, 5503-5510.
doi.org/10.1016/j.physa.2010.06.063

25. International Monetary Fund. (2015). Annual report on exchange arrangements and exchange restrictions. Washington, DC: Author.