Money-Credit Policy Impact on Inflation and Output: The Ukrainian Case

Different speed and aftermath of the transition of twenty post-communist Central and Eastern European countries to free-market economy has posed a question about political and economical reasons led only some countries being successful in their transformation. The attempt was done in this paper to analyse five-year history of three stabilisation programmes undertaken in Ukraine where eventually economy seems to reach "low output - high inflation" equilibrium. The first chapter of the paper was devoted to the peculiar characteristics of monetary policy with special attention to inflation trend correlation with different monetary aggregates. The regression analysis showed that broad money with three-months lag and banking credits to the state sector of economy were mainly responsible for inflation hikes. Second part of the paper concentrates on reasons of steep output fall registered in the economy. As the Ukrainian government being faced with "inflation-unemployment (output)" trade-off has steadily tried to minimise output losses for the account of accommodative high-inflationary policy, output began to shrink and move to shadow economy in spite of persistent flow of direct government financial support to the economy. Any attempts to conduct contractionary monetary policy led on impact to worsening of arrears problem. The arrears chain appeared in the economy since 1993, and inter-enterprise arrears fast growth has caused severe financial crisis through whole economy resulted in the appearance with three-year lag socially dangerous tax arrears, wage arrears, and pension arrears. The cross-section regression analysis clarified that arrears can be mainly linked to the presence of the bulk of ineffective state-owned loss-making enterprises existed under soft budget constraints.