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The economic crisis in Ukraine is going on: real GDP in the first quarter of 2021 decreased by 1.1% compared to the previous quarter and by 2% compared to the first quarter of 2020. The unemployment rate (as a % of labor force) was 10.1%, reaching maximum value in recent years.

The dynamics of unemployment in quarterly terms during the third quarter of 2019 – fourth quarter of 2020 were upward: the unemployment rate increased from 7.3% to 10.1% (see Fig. 1). The number of deaths from the coronavirus in Ukraine has already totalled 49 thousand people, and in terms of mortality per 100 thousand population, Ukraine has entered the first quartile of the world’s countries, ranking 40th among 206 countries. According to this tragic indicator, Ukraine has tripled the world average: 112 people in Ukraine against 44 people in the world per 100,000 population.

Figure 1. Unemployment rate of the population of Ukraine aged 15-70 years (as a % of labor force of the corresponding age)
Source: State Statistics Service of Ukraine

And under such conditions, the National Bank of Ukraine makes “Solomon” decisions to raise the key policy rate from 6% to 6.5%, starting from March 5, and then to 7.5%, starting from April 16, on the basis of increasing inflationary pressures in the economy. Such decisions essentially meant that the National Bank of Ukraine, in combating inflation by suppressing aggregate demand, was ready to sacrifice the recovery of GDP and employment to achieve the inflation target. And this is despite the fact that the National Bank of Ukraine itself admits that current inflation in Ukraine is mainly non-monetary, and the annual growth rate of prices by non-monetary components in March 2021 was 12.2%, compared with 2.3% growth in prices by monetary depending components. Given the non-monetary nature of inflation and its import from outside, the attempts to curb inflation by raising the key policy rate within the country will not give the expected effects. However, undoubtedly, the tightening of monetary policy will have a negative impact on real GDP and unemployment rate in Ukraine.

It is significant that the United States is also facing similar challenges in both price stability and humanitarian consequences of the pandemic and the continuing economic crisis. The number of deaths from coronavirus in the United States is approaching 603 thousand people, and according to the mortality rate per 100 thousand population (181 people) the United States ranks 18th in the world (see Fig. 2). At the same time, the economic dynamics in the United States are more optimistic than in Ukraine. Real GDP in the first quarter of 2021 increased by 1.6% compared to the previous quarter and by 0.4% compared to the first quarter of 2020.

Figure 2. Countries with the highest mortality from COVID-19 per 100 thousand population among 206 countries as of 19.05.2021
Source: Compiled by the author based on

US statistics for April showed a rise in inflation to 4.2% year on year. The US Federal Reserve did not respond to such inflation surge with changes in monetary policy; officials have only made a few statements that they do not see current inflation as a serious threat and consider it temporary, related to the opening of the economy after long quarantine restrictions. The Fed’s restrained response to rising inflation is fully in line with its mandate and new monetary policy strategy. In August 2020, a new “Statement on Longer-Run Goals and Monetary Policy Strategies” was adopted, which defines maximum employment in the economy as a broad-based and inclusive policy goal. It is noted that monetary policy decisions will be determined by estimates of the employment deficit relative to the maximum level. At the same time, the inflation target of the US Federal Reserve at the level of 2% is defined as long-term, which implies the possibility of exceeding the actual inflation rate of 2% over a “certain period of time”.

Currently, there is an active debate in US intellectual circles about the temporary or protracted nature of inflation in the United States and the desired response of macroeconomic regulators to inflationary spikes. Some analysts point out that a significant rise in prices was observed in only a few sectors (airfare, car rental, copper and wood), which are characterized by a combination of supply shortages and a sudden increase in demand. Therefore, in their opinion, by the end of the year the inflation surge will have been repaid as supply is restored and demand is normalized.

Against this background, the authoritative think tank – the Institute for New Economic Thinking (New York) – published the work of Italian scientists C. Fontanari, A. Palumbo and C. Salvatori “Slack in the Economy, Not Inflation, Should Be Bigger Worry”. Researchers point out that the pace of recovery in the US economy is not satisfactory and the unemployment rate is increasing, with 8 million jobs lost with respect to the pre-pandemic period. They offer their own estimates of the output gap, which differ significantly from official data for the worse and point to the weakness of the economy and the need to continue fiscal and monetary stimulus.

C. Fontanari, A. Palumbo and C. Salvatore note that the pandemic has reinforced the disconnect between inflation and unemployment, and therefore rising inflation will not help reduce unemployment in the US economy. They argue that if the Fed moves to a tighter monetary policy in the current environment and the US Congress abolishes the latest package of fiscal stimulus, such actions will cause distress for the economy, which will produce significant underutilization of production capacity and labor. Not only would this worsen the current economic situation in the United States, but it would also create long-term damage to the economy, which American history has shown more than once.

Therefore, in the context of recent events and the reaction of central banks to identical problems, the “modern”, “progressive” and “independent” National Bank of Ukraine acts as the antithesis of the US Federal Reserve. However, the huge problem of our country is that these beautiful epithets, which the NBU itself ascribes to itself, have nothing to do with common sense and the responsibility of the central bank to society.

Tetiana Bogdan, Doctor of Economics, Scientific Director at the Growford Institute for LB.UA.