Modeling Inflation Dynamics in Transition Economies: The Case of Ukraine

Abstract

This paper explores the dynamics of inflation in Ukraine in a period of relative macroeconomic stability. The analysis of the interrelationship among inflation, money growth, wage growth, and devaluation expectations is based on impulse responses and variance decomposition of a vector autoregression model. We find that changes in devaluation expectations appear to be the most important factor driving price development, while money supply growth has negligible impact on inflation. In addition, our results show evidence of a high degree of inflation inertia, which may reflect the specific institutional settings of the Ukrainian economy.