Good intentions: five reasons not to force the National Bank to print money to stimulate the Ukrainian economy
Ukraine’s economic situation is very difficult and naturally we all think of ways to find a solution to stimulate growth, reduce unemployment, and raise incomes. We look for answers from famous economists and historical examples. Given the diversity of opinions and precedents, we are not surprised to see many proposals. One such proposal is to instruct the National Bank of Ukraine (NBU) to implement a «productive emission». In other words, the NBU should provide loans to Ukrainian firms or sectors that are deemed important for resuming economic growth in the short run and sustaining economic development in the long run. We believe that such a policy will be counter-productive and likely detrimental for achieving both goals for several reasons.
First, Ukrainian legislation unambiguously stipulates that the objective of the NBU is to ensure stable purchasing power of the hryvnia (that is, inflation must be low and stable). Given that the NBU is actively engaged in reducing inflation, a monetary emission at this stage will undermine the hard-earned credibility of the central bank. Indeed, how can the NBU claim fighting inflation if at the same time it prints money to help a few firms or sectors of the Ukrainian economy? The conflict of these two policies is clear. Because the margin of error is so small for the NBU (the reserves are not as high as one would like them to be and the banking sector still faces a number of challenges), a likely outcome of a «productive» emission is depreciation of the hryvnia and consequently more inflationary pressure on the hryvnia and potentially lower incomes for workers.
Second, the advocates of this proposal argue that «productive» emissions are feasible in the New Keynesian macroeconomics. Students of this theory however know that any expansionary monetary policy has temporary effects at best. Indeed, since the famous analysis by Milton Friedman and Edmund Phelps (both won a Nobel prize in Economics), we know that the government can use emissions (which means inflation) to fool consumers and firms only in the short run. In the long run, there is no trade-off between emissions and the level of employment: emissions have zero effect on employment. Intuitively, one cannot create something real (employment) from something virtual (paper money).
Third, «productive» emissions presume that the government has a better idea about which sectors are more productive than private investors do. But the current economic environment in the world is highly dynamic. Who knew 10 years ago that tablets would outsell laptops or that electric cars will be so popular? To respond to ever changing demands of consumers, the economy has to be flexible and nimble. The government hardly fits this description. In fact, the natural experiment of the Soviet Union showed conclusively that this presumption is clearly wrong.
Fourth, Ukraine is infamous for its corruption. To a large extent this high level of corruption stems from pervasive involvement of the government in the economy (regulation, state-owned enterprises, etc.) which creates opportunities for bribes, abuse of office, and other forms of corruption. The strategic course of the post-Yanukovych government is to reduce the involvement of the government in the economy to eliminate opportunities for corruption. Now imagine that the NBU allocates billions of hryvnia in credit. In the Ukrainian reality, this will create enormous opportunities for corruption and thus could destroy not only the independence and reputation of the central bank but also its capacity to do any sensible monetary policy. We should all remember that even in the worst of times, reputable central banks (Federal Reserve System, Bank of England, Bank of Canada, European Central Bank, etc.) do not lend money directly to nonfinancial firms.
Finally, Ukraine can learn from its own experience with productive emissions. We all remember that in the early 1990s, the government did not have resources to rescue collapsing economy. The solution was to invite the central bank to provide loans to the firms. Once this process started, it was very hard to stop: the queue of businesses waiting for a special treatment was never ending. The bottom line of that productive emission was acutely felt by millions of Ukrainians: hyperinflation and collapse of the economy.
In summary, productive emission may appear a silver bullet for Ukraine but it is not. Instead, private banks should allocate credit to ensure that loans are given to firms that have the best prospects. Any government support should go through the Parliament and the cabinet so that everyone understands the cost, the source of funding, and the recipient. Any gains from such emissions are short term while the costs are potentially devastating. The NBU is not the right tool to support strategically important firms.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any agency of the Ukrainian authorities, including the National Bank of Ukraine or the Council of the National Bank of Ukraine or any organization at which the authors are employed. Assumptions made within the analysis are not reflective of the position of any Ukrainian government entity or organization.
The authors do not work for, consult to, own shares in or receive funding from any company or organization that would benefit from this article, and have no relevant affiliations