Stabilisation policies in Ukraine in the time of the COVID-19 pandemic

Abstract

This paper aims at both theoretical and empirical assessment of stabilization policies in Ukraine in the wake of a contractionary macroeconomic shock of the COVID-19 pandemic. Various aspects of fiscal and monetary policies are analyzed within the theoretical framework of a dynamic AD–AS model with a focus on the exchange rate effects. It is demonstrated that output effects of fiscal and monetary policies depend on inflationary inertia measured as the correlation between present and lagged inflation. Depreciation of the exchange rate is inflationary and can be contractionary under both low and high inflationary inertia. For Ukraine, it is found that the supply-side recovery is of priority, in contrast to the majority of industrial countries where insufficient demand is the biggest problem. Using the 2SLS estimator, it is obtained that a non-inflationary increase in the GDP growth rate is expected under a decrease in the excessive money supply combined with the exchange rate appreciation. As the exchange rate is still undervalued due to effects of the large devaluation of 2014–2015, a combination of conservative monetary policy and moderate exchange rate appreciation should not raise any concerns. Our results reject frequent speculations that a local appreciation of the hryvna has been responsible for the GDP slowdown since the middle of 2019. Fiscal policy seems to be neutral in respect to both inflation and GDP. Among other results, it is found that an increase of the Euro area output by 1% contributes to the GDP growth rate in Ukraine by 0,6-0,7 percentage points. As suggested by a dummy variable, a deep economic slump of 2014-2015 was not caused by structural shifts in the Ukraine’s economy, with a large depreciation of the hryvna and excessive money supply being the most relevant explanatory factors.