Deficits, Inflation and the Political Economy of Ukraine

Abstract

Ukraine Oleh Havrylyshyn, Marcus Miller and William Perraudin Why has inflation in Ukraine exceeded that in other republics, and the pace of reform lagged behind? Evidently the failure to stabilize public finances has led to enormous monetary expansion, and so to a profound fall in both the internal and external value of money. We look specifically at how the inflation tax has been used to finance fiscal deficits in Ukraine and discuss how this can ultimately lead to accelerating inflation and currency collapse. To understand the reluctance to stabilize and to reform, we examine the political economy of Ukraine. The key sticking point seems to be the ability of powerful interest groups to block changes which threaten the 'rents' they receive from the partially reformed system. In the absence of more effective political leadership, an even deeper economic crisis may be necessary before stabilization is achieved.