Inflation Targeting As a Tool for Maintaining Price Stability of The National Bank of Ukraine

Abstract

Introduction. Inflation targeting is a tool for ensuring price stability in the economy and therefore requires harmonious coordination and communication among government institutions. At the same time, the central bank must adhere to a certain policy instrument, the established legal rules, which are fixed in its mandate, or act at its discretion. Nowadays, the most common rule of monetary policy is inflation targeting.
 Aim and tasks. The purpose of the article is to explain the expediency of using the inflation targeting regime to keep inflation at a certain target level, which is determined by the central bank taking into account the current state of the economy.
 Results. The theoretical model of Taylor is considered, which is based on inflation assessment in the form of a simple interest rate rule based on monetary policy instruments that ensure convergence of the inflation forecast to the target value in the medium term. The obtained results reflect the volatility of the indicators of the objective function in the data range of 2015 Q3–2021 Q2 and confirm the weight of the gap of variable values that are estimated to be insignificant (95%). Using the GMM method, the relationship between the indicators of the objective function and their impact on the inflation rate through the use of the inflation targeting regime was verified. In particular, the volatility of variables such as the inflation gap, short-term interest rate, output gap, and exchange rate gap and their impact on the target inflation rate was revealed on the time horizon of monetary policy. Smoothing out gaps in variables is one of the goals of the central bank's reaction function under the inflation targeting regime. The use of the GMM method confirms the validity of the application of Taylor's rule regarding the feasibility of choosing an objective function with predetermined variable parameters at different sampling intervals.
 Conclusions. The increase in the volatility of variable parameters in the objective function of central banks under the inflation targeting regime is explained by global crises and the sensitivity of macroeconomic indicators to fluctuations in the economic situation. This is the main reason why central banks strictly follow the rules of monetary policy, which allow the timely smoothing of exogenous shocks in the economy.