Monetary and fiscal policies have a strong influence on each other. In most cases, policies of central banks and government are of a complementary nature. Most actions taken by central banks to pursue price stability contribute to long-term fiscal stability, while a solid fiscal policy as a rule equally supports price stability. But in some cases, especially in the short-term, decisions by central banks can have a negative impact on fiscal policy, while measures taken by the government can also affect monetary policy in a negative manner. In order to secure macroeconomic stability in the short- and in the long-run, it is essential to minimise potential conflicts between the government and the central bank of a given country. This is usually done by establishing an adequate institutional framework for the policy interaction between these institutions.
While the policy framework in Ukraine has developed positively in recent years, there are several directions for improvement. First, this concerns the deposits of the government at the National Bank. In order to support monetary policy and liquidity management, a constant flow of information is required on the estimated daily net transactions at the government's account. Besides, plans to place government's funds with commercial banks using government bonds as collateral ("reverse repos") should not be adopted, since this would dry up liquidity in the market for government bonds. Second, a direct and unhealthy competition between NBU's and government's securities on capital markets should be avoided. Current government's plans to introduce a regular issuance calendar for government debt and the foreseen securitisation of government debt with the NBU would clearly contribute to avoiding such an unhealthy competition. Besides, the NBU should try to restrict its issuance to mainly short-term titles, once enough liquidity for government bonds exists. Third, conducting an effective anti-cyclical macroeconomic policy requires a better coordination of monetary and fiscal policies. Currently, monetary policy bears almost all the burden for fighting inflation, while fiscal policy remains expansive and thus inflationary. A coordinated macroeconomic approach would be much more effective. Also, it would lessen the need for the NBU to restrict monetary policy and to increase interest rates.
