POST-WAR INFLATION TARGETING: KEY CHALLENGES

Abstract

The National Bank of Ukraine (NBU) suspended inflation targeting for the period of martial law, but announced a return to it as soon as the situation allows. The post-war normalization of monetary policy in Ukraine is historically unprecedented, since most of the known cases involve the relaunch of money circulation and the adjustment of banking activities, the establishment of the central bank as an institution designed to eliminate the macroeconomic preconditions of internal conflicts. At the same time, military conflicts are characterized by monetary financing of the budget, a spike in inflation and increased dollarization, and seigniorage may be the optimal form of compensation for a sudden loss of tax revenues only to a limited extent. The restoration of inflation targeting in Ukraine will face a number of general macroeconomic challenges such as: acceleration of inflation, delay in the adjustment of non-core inflation components, uncertainty regarding the volume of monetary financing of the deficit after the end of martial law; degradation of monetary transmission; decline in inflation expectations and likely strengthening of pass-through effects. However, these challenges are more likely to affect the timing of return to inflation targeting. From a technical point of view, this process will encounter problems related to: specification of the inflation target (new "sloping" corridor, actualization of the old target in various forms); probable optimal decrease in its level due to European integration; decline in the criterion values of GDP gap and the level of neutral rate when assessing the monetary policy stance; resuming the accumulation of foreign exchange reserves with the corresponding continuation of the tendency to maintain the liquidity structural surplus. The independence of the NBU will play a key role in neutralizing the credibility problem in the face of potential alternative between the speed of inflation stabilization and the acceleration of economic recovery.