Ukraine inflation targeting framework which aims at setting quantitative

Ukraine presently has spare capacity
i.e. negative output gap (Picture
X gap). Thus the immediate requirement is to increase aggregate demand (AD)
which will have succeeding affect on employment and inflation. This should in
principle drive the economic growth and pull Ukraine further away from
recession. To achieve this as a short term challenge, three demand side polices
are recommended below.

A.   
Fiscal
Policy

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Fiscal policy should be anchored to
gradually reduce government budget deficit to GDP which is currently at 3.1% of
GDP. The long term target should be below 1% of GDP but mid terms targets for
2018 & 2019 should be kept at 2.5 & 2% respectively. This objective
will be preliminary achieved by increasing capital investment spending in
public infrastructure and decreasing current government spending. The other
major contributor in controlling this budget deficit will be tax revenue.
Instead of tax cuts or tax raise, the government should focus on implementing
& tightening existing tax administration to cover all loop holes in system.
Focus should be to correlate increasing wage rate with increasing social
security contribution. Any tax reforms or tax evasion schemes promoting tax
savings or special commercial tax treatment should be avoid for few years till
2020. The illegal activities like gambling and amber mining which are run by traditional
mafias should be legalized with higher tax bracket. This will provide necessary
additional liquidity push to government revenues. Lastly revenue expenditure
& spending details between central & local government bodies should be
audited to avoid accumulation of residual revenue at local levels. Any increase
in revenues should be subsequently used to increase capital investments.

B.   
Monetary
Policy

The monetary policy of Ukraine is
focused on inflation targeting framework which aims at setting quantitative
goals to reduce inflation. The inflation target for 2017 is 8% but at 2017 Q3 it
is hovering at 12%. For future the medium level targets for inflation should be
set at 6% & 5% for 2018 & 2019 respectively which are quite reachable
looking at global perspectives. To achieve this objective, holding stable
prices and maintaining flexible exchange rate are the key priority factors. The
NBU should also tighten this inflation targeting framework by  developing interbank market with help from liquidity
forecasting & management. Meeting these inflation targets are very vital in
attracting global investments, establishing market credibility and stabilizing dollarization.
If the inflation targets are derailed by market outlook or geopolitics shocks
then the key interest rate should be used as a tool to bring inflation within a
realistic forecast with some margin of error. The importance of decreasing inflation
rate and relaxing foreign exchange regulations will seen in increasing international
reserves. These foreign currency reserves should be linked back to investing in
infrastructure, increasing liquidity in market and improving aging service
sectors (heath and education).  

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