The economic prerequisites for the monetary reform were as follows:
- restoration of industry and transport;
- expansion of product offerings;
- transfer of enterprises to commercial settlement as a result of the implementation of the principles of the new economic policy;
- abolition of state supplies for enterprises producing consumer goods;
- allowing private trade;
- active trade balance;
- accumulation of gold reserves and foreign currency reserves;
- development of a network of credit institutions;
- restoration of the taxation system, which ensured growth and regularity of revenues to the budget, reduction of the budget deficit;
- creation of a public debt market through the placement of in-kind and cash loans.
Preparatory measures included two denominations - in November 1921 and December 1922, which made it possible to reduce the circulating nominal paper money supply. In order to prevent new rounds of inflation, it was decided to use conditional fixed measures of prices for goods and services, one of which was the gold ruble - commodity producers were obliged to calculate payments in pre-war gold rubles with their subsequent transfer to Soviet banknotes at the rate in accordance with the prevailing quotes.
The idea of the reform was the following set of cause-and-effect relationships:
release of hard money -> establishment of wholesale and retail trade -> accelerated restoration of enterprises -> growth of production -> increase in the budget revenue base -> abandonment of emissions paper money to finance budget expenditures.
As a result of the reform, the currency became the chervonets - a bank note worth 10 rubles. (Fig. 3.19), having gold content, similar to the pre-revolutionary gold coin (7.74234 g). The monopoly right to issue chervonets was granted to the State Bank of the USSR. Important element The mechanism for carrying out the reform was the parallel circulation of old and new money, since the state continued to use the budget money issue of Sovznak.
Rice. 3.19. Tickets of the State Bank of the RSFSR in denominations of 1 and 3 chervonets, model 1922.
The new monetary unit was intended exclusively for servicing economic and commercial turnover. The relationship between chervonets and sovznaki was formed according to market rules and depended on the state of supply and demand, and the preferences of market subjects. Thus, a new currency was proposed
market as an official contender for the role of a universal monetary equivalent, which was supposed to ultimately replace the previous instrument, which had exhausted its usefulness in this capacity.
Chervonets is a bank currency issued in a strictly regulated manner in the course of the credit and issuing activities of the State Bank against real material security or in exchange for real values. To maintain the stability of chervonets in relation to inflation, their exchange for foreign currency and gold in coins and bars was envisaged. The provision of chervonets had the following structure: 25% - in precious metals, 75% - in easily marketable goods, short-term bills and other short-term obligations. The text of the banknotes states that one chervonets contains 1 spool of 78.24 shares of pure gold. The bank note can be exchanged for gold. The beginning of the exchange is established by a special government act. Bank notes are backed in full by gold, precious metals, stable foreign currency and other assets of the State Bank. Bank notes are accepted at their face value in payment of government fees and charges levied by law in gold.
Another measure was of fundamental importance - the introduction into economic circulation of the so-called gold calculus, or “gold account” in pre-war rubles. There were a number of objective and subjective reasons for this:
- the population had a significant supply in their hands metal coins old (pre-revolutionary) coinage (in 1922 - about 200 million gold rubles);
- the pricing system, revived during the NEP years, had a natural historical basis the pre-revolutionary price structure formed within the framework of the monetary structure of the gold coin standard based on the Russian gold ruble;
- the golden monetary system was in everyone’s memory, so for most people the “pre-war ruble” was a well-known value suitable for the role of a conventional unit of account.
As a result, two price systems emerged in the country and operated in parallel - in paper money and in gold, which were interconnected by the exchange rate of the gold ruble in Sovznak. The parallel circulation of chervonets and sovznak remained until March 1924.
The parity of the chervonets with gold required not only legislative fixation, but also real confirmation. For these purposes, the State Bank carried out currency and gold interventions - it bought bank notes on the stock exchange for gold and currency, which led to an additional increase in demand for chervonets. In addition, to ensure connection with gold, gold chervonets were issued in 1923. As a result of the monetary reform, the money supply decreased by 50 trillion rubles.
In 1924, the unification of monetary circulation was carried out:
- Sovznak was officially abolished. A fixed rate of Sovznak in chervonets was announced and they were redeemed in exchange for treasury notes at the rate of 50 thousand rubles. in Sovznak 1923 = = 1 rub. in treasury notes. About 809.6 quadrillion soviet rubles were withdrawn from circulation;
- The issue of treasury notes began, denominated in rubles and having the nature of paper money, issued for the convenience of money circulation. Treasury notes were fractional parts of chervonets and were expressed in gold rubles;
- silver and copper coins were issued as change, which were a fractional part of the treasury ruble;
- To ensure the stability of monetary circulation, the People's Commissariat of Finance of the USSR set a limit on the issue of treasury notes, which in 1924 amounted to 50% of the amount of bank notes issued for circulation, and in 1930 it was increased to 100%. In 1925, the issue of treasury notes was also transferred to the State Bank of the USSR, and the treasury character was preserved only in relation to the issue of small change coins.
Thus, as a result of the reform, a new monetary system was formed with circulation and mutual exchange at fixed ratios of bank chervonets, treasury notes, as well as silver and copper coins with a price scale based on gold. Banknotes were backed by gold and had gold parity, but there was no gold currency circulation. The advantage of this system is that it did not have a shortage of means of payment, and at the same time, the danger of increasing paper money emissions could be neutralized by regulating the issue of banknotes.
The economic results of the reform are dynamic economic growth within the country, the development of foreign economic relations, a balanced and stable state of finances and monetary circulation. Monetary reform increased the role of money in economic development and restoration of commodity relations. As a result of the introduction of chervonets and state treasury notes into circulation, the financial position enterprises that no longer suffer losses from money depreciation.
However, a number of steps taken in 1925-1933 led to the abandonment of a stable currency:
- restriction of the activities of private capital and the subsequent complete liquidation of private entrepreneurship;
- disparity in prices for industrial and agricultural goods, limiting the formation of stable trade turnover;
- excessive bank lending to industry and formalization of self-financing of enterprises;
- ineffective methods of economic influence on Agriculture, restraining its economic growth (collectivization, dispossession);
- centralization of management and transition to administrative-command management methods.
These factors led to a shortage of commodity supply and inflation. As a result, in the second half of the 20s of the XX century. revision has begun theoretical concept money, which was associated with the transition from one model of the economic mechanism (NEP) to another - administrative-command. In this regard, B. Raskin’s statement is noteworthy: “...socialization monetary system is manifested in the fact that this system increasingly reflects the features of socialist receipts and less and less the nature of money.”
In 1926-1928. The chervonets ceased to be a convertible currency. After the credit reform of 1930-1933, aimed at centralizing credit processes in the economy and abolishing commercial lending and bill circulation, chervonets were actually forced out of circulation by bank and treasury notes denominated in rubles. A fiduciary standard has been established in monetary circulation.
During the Second World War, the government was forced to resort to emissions as a source of covering military expenses. By the end of the war, it was four times higher than the pre-war level, and the volume of retail trade turnover, on the contrary, decreased by more than 2/3, due to which the commodity supply of the money supply decreased and the inflationary process developed. There was a surplus of money in circulation, which led to an increase in market prices and a decrease in the purchasing power of the ruble.
Reform from lat. means "transformation". In a broader concept, reform is the transformation or change of something. Reforms can be radical or partial, touch or not touch the foundations of the social system, be progressive or reactionary in nature.
Currency reform- this is a complete or partial change in the monetary system with the aim of building and strengthening it. In practice, monetary reform is the main tool in reducing inflation and eliminating its most severe consequences.
Currency reform is a transformation of the monetary system carried out by the state with the aim of streamlining and strengthening monetary circulation, accompanied by the release of new banknotes into circulation and the forced withdrawal of old ones.
As a rule, monetary reforms are carried out when the type of production or socio-economic formation changes (the gold standard was replaced by credit money), as well as during the period of restoration of the economy destroyed due to various reasons (revolutions, wars).
Types of monetary reforms
Complete monetary reform- this is the creation of a new monetary system. It is carried out during the formation of new states or the creation of a national monetary system in the event of the unification of the monetary systems of several countries (for example, the creation of a unified monetary system of the countries of the European Union).
Partial currency reform- this is the streamlining of the existing monetary system in order to stabilize monetary circulation. When carrying out a partial monetary reform, individual elements of the monetary system change: the order of issue, banknotes, and the name of the monetary unit.
Confiscation monetary reforms- a reform that changes (usually reduces) the purchasing power of money.
Non-confiscation monetary reforms- reform without changing the purchasing power of money.
Monetary reforms can be “soft” or “hard” depending on the degree of devaluation or revaluation.
"Soft" reform allows for gradual implementation of changes. For example, a gradual transition to a new currency. The softest monetary reform: denomination.
" Tough" reform carried out instantly. The toughest monetary reform: nullification.
In a broad concept, monetary reforms mean a transition from one monetary system to another; in a narrow sense - a partial change in the elements of the monetary system.
Reforms are carried out using different methods depending on the existing political system, the situation of individual classes, and the state of the country's economy. Currency reforms are accompanied by the withdrawal from circulation of all or part of depreciated paper notes and their replacement with new money (both in cash and non-cash form); changes in exchange rates; restructuring of the monetary system with the introduction of new emission legislation. And during the period of use of gold as a monetary metal (until 1973), monetary reform also included a change in the gold content of money.
The following mechanisms of monetary reforms are known in the history of monetary circulation.
1. Transition from one monetary commodity to another, from one type of monetary system to another.
2. Exclusion of defective, depreciated or irredeemable banknotes from circulation and their replacement with full-fledged, exchangeable banknotes.
3. Introduction of new emission legislation.
4. Currency stabilization or partial measures to streamline monetary circulation.
5. Formation of a new monetary system in connection with government restructuring.
An example of the first type of change in the monetary system is the transition from one monetary unit to another.
The transition from one metal to another (more valuable), for example, from copper to silver, and from silver to gold, or the transition from bimetallism to monometallism, and from monometallism to the paper-credit system.
It can be determined that the transition from copper money to silver, and then gold takes place already in ancient Rome. And monetary reforms aimed at introducing a bimetallic monetary system with a subsequent transition to monometallism are characteristic mainly of the United States.
An example of the second type of monetary reform is the Law adopted in 1695 in Great Britain, according to which all old coins that had lost their weight had to be handed over for reminting into full-fledged coins.
Monetary reforms of the third type include, for example, the abolition of the procedure for issuing money in the United States in 1913, when 12 Federal Reserve Banks received the right to issue banknotes. The procedure for securing banknotes was also changed. Banknotes began to be issued not against government securities, but against gold (40% collateral) and commercial bills (60%).
The fourth type of monetary reform is the stabilization of monetary circulation: it can be carried out by different methods, of which the most typical are:
Nullification - declaration by the state of depreciated money as invalid. Sometimes it is an exchange of old money for new ones at a rate that reduces the exchange operation to a technical instrument. In essence, it is a type of monetary reform. It is carried out during a period of economic stabilization after hyperinflation, usually to restore confidence in the national currency.
Devaluation - comes from Latin: de - prefix meaning reduction, vа1ео - have value. Means a decrease in the exchange rate of the national currency to international currency units; earlier - until the abolition of gold parities in 1976 ~ 1978. - to gold.
The objective basis for devaluation is exchange rate distortion - an overestimation of the official exchange rate compared to the market one.
Revaluation - comes from the Latin: re - prefix meaning the opposite action, vа1ео - have value. It means an increase in the exchange rate of the national currency against foreign currencies or international currency units (previously against gold);
Denomination - changing the scale of prices and the method of increasing the face value of banknotes. Exchange of banknotes for new ones, with simultaneous recalculation of prices, tariffs, wages.
These methods were widely used in the history of monetary circulation.
Nullification was held in France in 1796-1797. during the transition from assignats and monetary mandates, which have depreciated (without their redemption) to full-fledged metal money; In 1924, an exchange was carried out in Germany: the new mark was exchanged for 1 trillion. old brands; after the end of World War 2, nullification was carried out in Yugoslavia, Romania, Greece, and Hungary.
Devaluation carried out in the USA in 1780, in Russia - in 1895.
Denomination was held in Austria in 1811, when old guilders were exchanged for new ones in a ratio of 5:1. In the 70-80s of the 20th century, monetary reforms were also repeatedly carried out in developing countries in the form of denomination at a ratio of 1000: 1: in Brazil, Zaire, Chile, Uruguay.
More often denomination carried out at the final stage of stabilization of the economy after a period of accelerated inflation. In the process of denomination, exchange is usually carried out without restrictions. For a smoother entry into circulation of new money, a period of parallel circulation of new and old money is introduced. Technically the exchange in modern society carried out in the form of issuing cash only of a new type and gradually withdrawing old money from circulation.
The fifth type of monetary reform is creation of new monetary systems. Such reforms are carried out during the period of collapse of empires and the creation of new states. The last type of monetary reform should include the reform that was carried out in Ukraine in 1996.
Currency reform in Ukraine
The need for monetary reform on the territory of Ukraine was determined by two main reasons:
Reasons for carrying out monetary reform in Ukraine
The proclamation of Ukraine as independent and independent states. The economic independence of Ukraine could be real only with the formation of its own stable national currency.
Ukraine, like all subjects of the former USSR, was in a deep monetary crisis, which was expressed in a significant depreciation of karbovanets, a breakdown in monetary circulation, a decline in the role of money and the naturalization of economic ties.
These processes intensified the decline in social production, reduced the living standards of the population, and slowed down the transition to a market economy and the formation of a market infrastructure.
Ukraine declared its intentions to introduce the hryvnia into circulation back in the summer of 1990, having developed and published the following regulatory documents: “Declaration on State Sovereignty of Ukraine”, Law “On Economic Independence of Ukraine”, “Concept of Transition to a Market Economy”. They developed the basis for introducing a national currency into circulation.
However, monetary reform was carried out in 1996.
This is due to the following reasons:
Reasons for the gradual implementation of monetary reform in Ukraine
Firstly, insufficient competence of authorities in conducting such economic activities
Secondly, the presence and deepening of the financial and economic crisis and structural imbalances in production
Third, blurred boundaries of the ruble zone, which continued to function after the collapse of the USSR in all post-Soviet republics, including Ukraine
On January 10, 1992, a quasi-monetary unit of multiple use was introduced - the Ukrainian coupon-karbovanets. The positive significance of this event was that Ukraine was able to avoid a deepening payment crisis that was dangerous for the sovereignty of the state. At the same time, this measure did not contribute to Ukraine’s exit from the ruble zone, since all non-cash turnover continued to be serviced in the Russian ruble.
The situation continued to remain unchanged for quite a long period of time - until November 1992. On November 12, 1992, the President signed the Decree "On the Reform of the Monetary System of Ukraine", according to which the coupon-karbovanets was introduced into the non-cash sphere of monetary relations.
The Russian ruble has ceased to function in the monetary circulation of Ukraine.
Before the introduction of the hryvnia in monetary circulation in Ukraine, many negative economic phenomena could be observed. For example, with rising inflation rates (July 1992 as a result of inflationary monetary policy), and later hyperinflation (in 1993), a decline in production could be observed.
Throughout November 1993, the situation worsened: changes in legislation in the field of currency regulation led to a deepening crisis in the financial and credit system, a sharp jump prices (prices increased 25 times), which led to an artificial shortage of banknotes.
However, during 1995 - 1996, these shortcomings were eliminated, which led to an acceleration of the turnover of the money supply. The money supply turnover rate increased significantly and amounted to over 10 turns, which indicates the formation of an effective monetary policy by the NBU.
The strengthening of stabilization processes in the first half of 1996 in the Ukrainian economy made it possible to begin the process of implementing monetary reform.
The implementation of monetary reform took place actively in a non-confiscatory civilized form, ensuring the inviolability of the population's monetary savings.
Monetary reform in Ukraine was carried out in accordance with the Presidential Decree “On monetary reform in Ukraine” dated August 25, 1996, on the basis of which a full-fledged national currency, the hryvnia, was introduced into monetary circulation
According to the Decree of the President of Ukraine, the transition to the new currency was carried out gradually:
For two weeks from September 2 to September 16, two means of payment were valid - coupon-karbovanets and hryvnia.
On September 2, 1996, the NBU stopped issuing Ukrainian karbovanets and issued banknotes worth 1,2,5,10,20,50 and 100 (and since 2002 - 200) hryvnia and billon coins with a nominal value of 1,2,5 ,10,25,50 (and since 2002 - 1 and 5 UAH) kopecks. The exchange was made in the ratio of 100 thousand karbovanets per 1 hryvnia.
The implemented monetary reform led to a significant decrease in the inflation rate - in 1997 it was one of the lowest for the entire period from 1992 to 1996 (10%) and this year the speed of money turnover decreased to 8.52 turnover per year. This ratio of indicators can be explained by the fact that throughout 1997 the positive trends laid down in 1995-1996 were still in effect. The reform also influenced the level of dollarization of the economy; if in 1994 it was 32.5%, then in 1997 it decreased to 13.33 %.
General features of the monetary reform in Ukraine in 1996.
The need is due to:
- the proclamation of economic independence of Ukraine;
The deep economic crisis, during which the instruments for managing monetary circulation did not function, reduced the role of money.
The prerequisites for carrying out the monetary reform were;
Achieving relative monetary stabilization;
Strict adherence to the boundaries of the established state budget deficit;
Creating a foreign exchange market and ensuring a sufficient supply of foreign exchange reserves;
Attracting external financial and technical assistance to create a stabilization fund.
Goals of monetary reform:
Replacement of the temporary monetary unit - the Ukrainian karbovanets - with a full-fledged national currency - the hryvnia;
Changing the price scale;
Improvement and streamlining of money circulation, overcoming the catastrophic socio-economic consequences of money depreciation.
The results of the monetary reform give reason to assert that from the technical side everything was thought out in detail, the reform was carried out without any fuss, according to the established procedure and within a certain time frame.
Consequences of inflation and anti-inflationary policy
As an economic phenomenon, inflation is well known and described in sufficient detail in the economic literature. And this is natural, since the 20th century for most countries of the world was the century of inflation. Only in a few countries and in brief terms was its absence noted.
Problems of inflation regulation occupy an important place in the theory and practice of monetary policy, since inflation indicators and its social consequences are indicators for assessing the economic condition of the country. The basic indicators used to measure inflation are price indices:
Wholesale price indices
Retail price indices
Export and import price indices
GNP deflators
GNP - gross national product, which determines the result of the activities of national factors of production both within the country and abroad.
Wholesale indices prices show changes in the average level of sales of products of industrial, commercial and agricultural enterprises.
Retail indices prices calculated either as an aggregate price index for products sold in retail trade, or only for a basket of socially significant goods. The second of these indices reflects the cost of living in the country and is especially important for the population.
Deflators GNP are determined by the volume of final products, which forms the value of GNP. GNP is defined as the sum of prices of goods and services purchased by households, government organizations, gross domestic public and private investment, and foreign trade prices.
Alternative options for measuring the level of inflation are also proposed, for example, determining the excess money supply using the equation of exchange (the law of monetary circulation) or comparing the increased level of prices in the national currency with their level in a relatively stable currency.
Foreign economists also offer various methods for determining the level of inflation. For example, using a price index measure that measures the relationship between the purchase price of a specified set of consumer goods and services (the “market basket”) for a given period and the aggregate identical and similar group of goods and services in the base period.
Price indexPrice of the “market basket” this year
in current = _____________________________________
yearPrice of a similar “market basket” in the base period
There are three main price indices: G. Paasche, Z. Laspeyres and I. Fischer. Price indices depend not only on the level of prices for goods and services, but also on the quantity of goods sold.
To calculate the Paasche index, the assortment set of the current year is used:
Price levelі -th product inXVolume of salesі th
Price index= this year goods in Tthis year
Paasche Price levelі -th product inXVolume of salesі th
base yeargoods this year
The Paasche index somewhat underestimates the level of inflation, since it does not take into account assortment shifts and attributes to the base year a new assortment set that developed in the analyzed year.
To calculate the Laspeyres price index, the assortment set of the base year is used:
IndexPrice levelі -th productXVolume of salesі th
Laspereiz = this year______ goods in the base year;
Price levelі thXVolume of salesі th
goods in the base yeargoods in the base year
The Laspeyres index somewhat overestimates the level of inflation, as it shows not only rising prices, but also changes in the assortment mix, including both price and structural factors.
The Fisher index averages the Paasche and Laspeyres indices:
Fisher index = Pache price index X Laspeyres price index
However, the Fisher index is quite cumbersome and is rarely used in practice.
The Laspeyres index is used most often, since to calculate it it is enough to take into account only price changes.
It is necessary to distinguish between internal and external factors of inflation.
TO internal factors include monetary (monetary) and non-monetary.
Monetary1st factors of inflation:
Overflow of the sphere of circulation with excess mass Money due to excessive emission of money used to cover the budget deficit
Oversaturation of bank loans to the state economy
Government methods for maintaining the exchange rate of the national currency, limiting its movement
Inflation can develop with a stable mass of money in circulation, with a reduction in the circulation of goods and services, which is due to the acceleration of money turnover. By economic effect accelerating the circulation of money, other conditions remaining unchanged, is equivalent to releasing an additional mass of money into circulation.
Non-monetary1st factors of inflation:
Structural imbalances in social reproduction
Costly management mechanism
State economic policy, including taxation
Foreign economic policy
During inflation, capital moves from the sphere of production to the sphere of circulation, since there the circulation speed is much higher, which makes it possible to obtain huge profits, but at the same time strengthens inflationary tendencies.
The inflation mechanism is self-reproducing, and on its basis the savings deficit increases, credit investments, investments in production and the supply of goods are reduced.
External factors of inflation are structural crises: raw materials, energy, currency
The socio-economic consequences of inflation are expressed as follows:
In the redistribution of income between population groups, spheres of production, regions, economic structures, firms, the state;
In the depreciation of cash savings of the population, business entities and state budget funds;
In the uneven rise in prices, which increases the inequality of profit rates in different industries, aggravates the imbalances in reproduction;
In the distortion of the structure of consumer demand due to the desire to turn depreciated money into goods and currency (the turnover of funds accelerates, and the inflation process accelerates accordingly);
Increasing speculative play on prices, currencies, interest, loans, which actively contributes to the development of the shadow economy;
In reducing the purchasing power of the national currency and distorting its real exchange rate in relation to other currencies;
In the social stratification of society, the exacerbation of antagonistic contradictions.
In addition to these consequences of inflation, there is also the effect of inflation taxation.
Inflation breeds inflation tax, the burden of which is borne by the entire population of the country. As a result of this tax, real savings are reduced, effective demand falls, and incentives to work are reduced.
Under the conditions of a progressive tax system and open inflation, the so-called effect inflation taxation.
Effect of inflation taxation - receipt of additional income by the state due to the transfer of taxpayers from one tax group to another (subject to a higher tax rate) as a result of indexation.
Thus, the consequences of inflation are contradictory and learning to manage its level is a complex and multifaceted task. To solve this problem, the state is developing an anti-inflationary policy.
Anti-inflationary policy is a set of measures of state regulation of the economy aimed at combating inflation.
Currently, three main types of anti-inflationary policies are used.
1. Deflationary policy (demand control)
2. Revenue policy (cost regulation)
3. Competitive stimulation of production
Deflationary policy: methods are used to limit money demand through monetary and tax mechanisms by reducing government spending, increasing interest rates on loans, strengthening the tax process, and limiting the money supply. Such policies, as a rule, cause a slowdown in economic growth and crisis phenomena.
Income Policy: involves simultaneous (parallel) control over prices and wages by freezing them completely or setting growth limits for them. This policy is ineffective, since a slowdown in price growth causes a shortage of goods, and the subsequent lifting of restrictions again causes a price jump. For social reasons, this type of anti-inflationary policy is rarely used.
Competitive stimulation of production: industrial policy, which is characterized by full state support for domestic producers and national production, includes measures both to directly stimulate entrepreneurship by significantly reducing taxes, and to indirectly stimulate savings for the population (reducing taxes on the population).
There are also other measures:
Indexation (full or partial) is compensation for losses resulting from the depreciation of money;
Forms of restraining controlled price increases, which are manifested:
Firstly, in the “freezing” of controlled price increases for certain goods;
Secondly, to contain their level within certain limits.
When choosing an anti-inflationary policy option, it is necessary first of all to correctly identify its sources.
If we are dealing primarily with demand-side inflation, the main directions of anti-inflationary policy will be:
Reducing the growth rate of the money supply through the implementation of restrictive monetary policy: increasing interest rates, reducing the issue of money, etc.;
A ban on the emission method of covering the budget deficit. When it comes to supply inflation, the government will:
Reducing tax rates in order to create incentives for production development;
Reducing the degree of monopolization of the economy through the implementation of active antimonopoly regulation;
Increasing productivity of production factors. The vulnerability of the monetary system to inflation requires improving methods of regulating money circulation and introducing new monetary policy instruments.
One of the new tools for regulating money circulation in the economy is targeting (setting goals or parameters). The following targeting tools are available:
- currency targeting policy: use of a fixed currency corridor and a fixed exchange rate;
- monetary aggregate targeting policy: using a given relationship between indicators of monetary aggregates as an intermediate goal of monetary policy.
- inflation targeting policy.
Inflation targeting
Term "targeting" borrowed from in English target means setting targets or quantitative parameters.
Inflation targeting is a relatively new monetary policy regime. It is believed to have been first used by the Central Bank of New Zealand in 1990. Over time, the number of countries that have switched to pursuing monetary policy using inflation targeting has grown rapidly: Canada (1991), Great Britain (1992), Sweden, Finland and Australia (1993) and others.
The first country with a transition economy to apply inflation targeting in practice was the Czech Republic, the first developing country was Brazil.
Inflation targeting can be characterized as a monetary policy regime based on using the inflation forecast as an intermediate target.
Targeting is carried out by the Central Bank, which predicts the upcoming dynamics of inflation and, based on this forecast, sets a quantitative inflation target for the planned period, without taking on obligations to achieve any other targets.
The main advantages of inflation targeting:
To conduct monetary policy, the unilateral nature of intermediate targets (for the exchange rate or money supply aggregates) is replaced by a synthesis of a number of macroeconomic indicators
Inflation targeting presupposes greater freedom and flexibility in the actions of the Central Bank
The Central Bank assumes formal obligations to achieve only the main target based on its forecast of price dynamics, which acts as a kind of intermediate target.
The state, business entities and the population cannot quickly monitor the state of monetary policy, which increases the responsibility of the Central Bank for the results of its activities. In this regard, one of the important aspects of inflation targeting policy is the ability of the public to evaluate the success of the policy pursued by the Central Bank, which requires a certain visibility of the results. By setting inflation targets, the Central Bank thereby determines the criteria for assessing its activities. Any deviation from the intended goals will require explanations from him about the reasons for what is happening.
Firstly, he must have a great deal of trust from society;
Secondly, his actions must be transparent.
The minimum conditions required to use inflation targeting are:
1. Inflation targeting is possible only in those states where low inflation actually exists, and not formally.
2. Targeting is in fact the fundamental goal of monetary policy.
3. Ensuring the proper degree of autonomy of the Central Bank and its use of targeting only for forecasting inflation.
4. The central bank must have complete freedom to make decisions regarding the use of monetary policy instruments
If the considered conditions for using inflation targeting exist, the Central Bank must determine a controlled indicator characterizing the rate of price growth in the country’s economy.
Central banks primarily use the consumer price index as a controlled inflation indicator. The regular consumer price index includes groups of goods and services, the prices of which are subject to the influence of factors beyond the control of the Central Bank: administrative price regulation, increased indirect taxes, rising prices for imported goods, etc.
When targeting, there is a need to determine the consumer price index, cleared of these factors.
An adjusted, “cleaned” index is used as an indicator controlled by the Central Bank, when it is excluded from the regular consumer price index separate groups goods and services, prices for which are regulated by the government or are subject to significant fluctuations independent of the actions of the Central Bank.
It is known that any forecasts are associated with uncertainty about the future and rarely completely coincide with the actual development of events. When forecasting inflation, knowledge of the operation of the transmission mechanism of monetary policy plays a decisive role. However, this knowledge is always imperfect even in industrial developed countries with a stable economy, since time lags and transmission channels are subject to constant changes, which certainly affects the quality of forecasting.
In the transition period, the use of inflation targeting places increased demands on the statistical and research departments of the Central Bank
The accuracy of forecasts is also hampered by the presence of factors that are difficult to predict, but have a significant impact on the price level in the economy.
Factors that make targeting difficult
Fluctuations in prices for raw materials (especially energy) on world markets;
Changes in agricultural production conditions that affect the prices of agricultural products;
Natural disasters and other force majeure events, manifested in the form of demand and supply shocks;
Deviation of the national currency exchange rate from forecast values that are not the result of domestic economic and monetary policy;
Problems of the quality of statistical data and their comparability.
When determining the targeting regime, the Central Bank has freedom of action in choosing models, instruments and even goals with the only caveat that its policy in mandatory should in its results reflect inflation indicators that are at a predetermined level.
Inflation targeting includes a number of elements.
Public announcement of medium-term inflation targets
Enshrined price stability in the developed monetary policy
Relative freedom of the Central Bank in choosing intermediate goals
Public notification of the market public about the goals and plans of the monetary
politicians
Increased responsibility of regulatory authorities for achieving planned indicators
Considering approaches to defining inflation as a quantitatively defined goal of monetary policy (target), several important aspects can be highlighted:
The period for which the goal is set, or during which this goal is planned to be achieved;
A measure of inflation or a price index, the numerical value of which is actually the goal;
Ways to set a goal.
Ukraine is undergoing a gradual transition to the use of inflation targeting elements. However, as the practice of the National Bank of Ukraine’s monetary policy shows, the simultaneous achievement of several targets set out in the “Main Directions of Monetary Policy”, as a rule, is not ensured.
This is partly due to the lack of consistency between the main monetary and macroeconomic indicators included in the calculations of the main monetary policy guidelines.
The elimination of these shortcomings will be facilitated by the wider use of financial programming methods, that is, the development and implementation of economic models and corresponding software in the practice of macroeconomic analysis and forecasting in the National Bank and the Government of Ukraine in order to ensure a greater balance of the most important macroeconomic and monetary indicators.
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