Inflation Performance

As we have shown earlier, different types of financing affect prices in different ways. The direct financing mechanism theoretically influences the inflation rate via monetary base expansion. Tbills (domestic borrowing) financing induces effects by crowding out for Investment and Net Exports i.e. indirectly. The result may vary with the exchange rate policy.

There is a choice of inflation indicators among consumer, producer prices or GDP deflator. CPI should react fast enough to changes in monetary policy. However, PPI seems to capture more of the exogenous shocks and imported inflation. The GDP deflator would be a good choice. Unfortunately, the latter is hard to estimate correctly, given the current availability of Ukrainian Statistics.

Figure 9. CPI Subindices December 1995 = 1 Source: State Statistics Committee. Calculations: ICPS

In evaluating the influence of deficit financing on inflation, the problem arises as to how to eliminate administrative and other exogenous shocks like the increases in household utilities in 1995-1998 and imported price shock of August 1998.

The utility shock could be clearly seen from the utilities prices graph that shows kinks in January 1996, April 1996, July 1996 due to administrative tariff adjustments to eliminate subsidies to households. There was also an adjustment in April 1999.

Figure 10. Budget Balance and Inflation % Source: State Statistics Committee. Calculations: ICPS

The part of the monetary base expansion due to fiscal imbalance could be approximated by the change in domestic credit of NBU to the government. In Figure 11, we can observe its lagged influence on inflation, with varying magnitude.

Figure 11. Change in NBU Credit to Government and Inflation mln UAH (left scale), % (right scale) Source: NBU. Calculations: ICPS

Until the begining of the crisis in August 1998, the central bank was able to neutralize the results of expansionary fiscal policy. Nevertheless the central bank's participation at the primary OVDPs auctions has changed its role from passive agent of the Ministry of Finance into active participant of the T-bills market.

As we have mentioned in the theoretical section, the NBU sometimes is able to increase it’s T-bills holdings without holding a large effect on money aggregates.The growth of budgetary liabilities at the central bank has not had a direct inflationary consequences due to the negative sterilization policy followed by NBU until the middle of 1998. The central bank was channeling money to government (by new TBills purchases) and simultaneously made the conversion for that part of Tbills withdrawn by non-residents from the market, decreasing the level of foreign reserves and keeping the monetary base rather stable.

Date: 2015-02-28; view: 741