ABSTRACT

Over the recent decade inflation targeting regimes have become very popular in many countries. The success these regimes have had and the benefits they bring to the economy persuade more and more central bankers to shift from their current policies to inflation targeting. This concerns both relatively advanced countries and transition economies, such as Ukraine’s. Adopting inflation targeting in Ukraine has been discussed by experts and policy makers for several years now. The local monetary authorities consider this option to be feasible over the medium-term. However, for this regime to be successful in a transition economy, it is very important that a set of preconditions be fulfilled. Among these are nominal exchange rate flexibility, absence of monetization of budget deficit, central bank independence and the ability of the central bank to control money supply, a clear understanding of monetary transmission mechanism, a sound and well-developed financial sector, accurate inflation forecasts, and so on (Mishkin, 2000; Carare, et al., 2002). In this chapter we discuss the past approach to monetary and exchange rate policies in Ukraine in order to assess the viability of an inflation targeting regime. We purposefully pay much attention to ‘negative’ aspects, that is, those that could create obstacles to a successful adoption of inflation targeting and hence require changes or improvements.