№ 8/2023

Fìnansi Ukr. 2023 (8): 38–59https://doi.org/10.33763/finukr2023.08.038

MONETARY POLICY

KHOKHYCH Dmytro ¹, LYUBICH Oleksandr ², BORTNIKOV Gennadiy ³

¹Kyiv National Economic University named after Vadym Hetman
OrcID ID : https://orcid.org/0000-0003-3787-939X
²SESE “The Academy of Financial Management”
OrcID ID : https://orcid.org/0000-0002-9339-4242
³SESE “The Academy of Financial Management”
OrcID ID : https://orcid.org/0000-0001-8388-6721

Transmission mechanism of monetary policy in the context of macroeconomic stability

Introduction. In 2020, the COVID-19 pandemic quickly spread to almost all countries, causing a downturn in the economy and worsening monetary stability. In terms of the scale of its effects, this stress even exceeded the impact of the global financial crisis. It was quite logical to revise the parameters of monetary policy, including lowering (or keeping low) key policy rates, accepting long-term refinancing operations, and reducing the required reserve ratio. All of these measures were intended to stimulate the economy, and the recent practice deserves an examination of how effective the transmission of monetary policy has been.
Problem Statement. The implementation of monetary policy in the context of the pandemic is giving rise to new academic discussions about transmission channels, as well as the combination of the general and the particular in the context of countries.
The purpose is to examine the transmission mechanism of monetary transmission to achieve the inflation target and ensure sustainable economic growth of the national economy.
Methods. General scientific and specific methods of scientific cognition were used. In particular, the study used system analysis to describe models of the monetary policy transmission mechanism; abstract and logical analysis to summarize and build logical links between individual links in the monetary policy transmission mechanism; and statistical and economic analysis to analyze the impact of monetary transmission on inflation under the inflation targeting regime.
Methods. System analysis was used to describe models of the transmission mechanism of monetary policy; abstract-logical – for summarizing and building logical connections between separate links of the transmission mechanism of monetary policy; statistical and economic - to analyze the impact of monetary transmission on inflation within the framework of the inflation targeting (IT) regime.
Results. Transmission channels are defined as the chain of transmission of the impact from the key policy rate (discount rate) to the next link in the monetary transmission chain.
Because of its properties (systematicity, consistency, and microfoundedness), neo-Keynesian logic is well suited to the main macroeconomic models that belong to the class of structural models (including both classical DSGE and semi-structural models). The model used by the National Bank of Ukraine to describe the transmission and build a medium-term forecast of the domestic economy also belongs to the class of structural models. A structural model in the neo-Keynesian logic combines the three most powerful transmission channels - interest rate, exchange rate, and expectations channels. An impulse in the key policy rate is instantly reflected in the 10-day interbank lending rate, and this rate is therefore the NBU's operational target for monetary policy. From the interbank lending rate, the impact of monetary policy is transmitted further to rates in other segments of the money market. Changes in interest rates affect the consumption and investment decisions of economic agents. From market interest rates and financial asset yields, the monetary policy impulse spreads further to lending activity and balance sheet indicators of companies and banks. Changes in the key policy rate affect prices and the value of assets on companies' balance sheets. From the credit sector, the impulse is smoothly transferred to economic activity and inflation. Aggregate demand, expectations, the exchange rate, and producer costs respond to monetary policy. Monetary policy affects expectations and, consequently, inflation by creating an “anchor” for its expected level in the medium term.
Conclusions. Achieving the inflation target through the use of the IT regime is an important condition for achieving macroeconomic stability. The NBU's transition to IT was justified, as evidenced by the proven hypothesis of a sharp decline in inflation and price volatility in the medium term. Prices stabilized through the expectations channel. A timely response to the challenges of the pandemic should be accompanied by an easing of monetary policy aimed at reducing the cost of financial resources and restoring long-term lending to the economy. The experience gained enabled the banking system to withstand the next shock - a full-scale Russian aggression against Ukraine, using proven approaches. Studies have shown that the inflation target of 5% ± 1 p.p., which is optimal from the NBU's point of view, does not affect economic growth. The use of the key policy rate instrument demonstrates a delayed reaction of market participants with a lag of 9-18 months. The regulator focuses on the inflation target and, once it is achieved, on measures to support inflation within the planned target. Resolving the dilemma between the planned inflation rates and maintaining economic growth requires regulatory changes to the laws governing the central bank.

Keywords:transmission mechanism, monetary policy, key policy rate, central bank, coronavirus pandemic, interest rate, inflation targeting

JEL: E50, G21

KHOKHYCH D. . Transmission mechanism of monetary policy in the context of macroeconomic stability / D. . KHOKHYCH, O. . Lyubich, G. . Bortnikov // Фінанси України. - 2023. - № 8. - C. 38-59.

Article original in Ukrainian (pp. 38 - 59)

Download

Downloads :58

1. Mishchenko, V. (2015). The role and functions of monetary transmission mechanism in ensuring price stability. Finance of Ukraine, 1, 29–46. Retrieved from finukr.org.ua/?page_id=723&aid=4173 [in Ukrainian].
2. Dziubliuk, O. V. (2012). Prospects for optimization of transmission mechanisms of monetary policy in the period of crisis phenomena on financial markets. Finance, Accounting and Auditing, 19, 55–64 . [in Ukrainian]
3. Koralin, S. (2023). Inflation targeting in Ukraine: some aspects, results and conclusions. Finance of Ukraine, 6, 34–46; 7, 37–53. [in Ukrainian]. doi.org/10.33763/finukr2023.07.037
4. Sharov, O. (2023 Monetary policy risks: “new reality”. Finance of Ukraine, 5, 30–49 [in Ukrainian]. doi.org/10.33763/finukr2023.05.030
5. Clarida, R., Gali, J., & Gertler, M. (1999). The Science of Monetary Policy: A New Keynesian Perspective. Journal of Economic Literature, 37 (4), 1661–1707. doi.org/10.1257/jel.37.4.1661
6. Wei, X., & Han, L. (2021). The impact of COVID-19 pandemic on transmission of monetary policy to financial markets. International Review of Financial Analysis, 74, 101705. doi.org/10.1016/j.irfa.2021.101705
7. Aloui, D. (2021). The COVID-19 pandemic haunting the transmission of the quantitative easing to the exchange rate. Finance Research Letters, 43, 102025. doi.org/10.1016/j.frl.2021.102025
8. Prabheesh, K., Juhro, S., & Harun, C. (2021). Covid-19 Uncertainty and Monetary Policy Responses: Evidence from Emerging Market Economies. Buletin Ekonomi Moneter Dan Perbankan, 24 (4), 489–516. doi.org/10.21098/bemp.v24i4.1692
9. Pinshi, C. P. (2020). Monetary Policy, Uncertainty and COVID-19. Journal of Applied Economic Sciences (JAES), XV (69), 579–593.
10. Mishra, P., Montiel, P. J., & Spilimbergo, A. (2012). Monetary Transmission in Low-Income Countries: Effectiveness and Policy Implications. IMF Economic Review, 60 (2), 270–302. doi.org/10.1057/imfer.2012.7
11. Taylor, J. B. (1995). The Monetary Transmission Mechanism: An Empirical Framework. The Journal of Economic Perspectives, 9 (4), 11–26. doi.org/10.1257/jep.9.4.11
12. Bryant, R., Hooper, P., & Mann, C. (1993). Evaluation Policy Regimes: New Empirical Research in Empirical Macroeconomics. Washington, D.C.: Brookings Institution.
13. Henderson, D. W., & McKibbon, W. J. An Assessment of Some Basic Monetary Policy Regime Pairs: Analytical and Simulation Results from Simple Multiregion Macroeconomic Models. In Bryant, R., Hooper, P., Mann, C. (Eds.). Evaluation Policy Regimes: New Empirical Research in Empirical Macroeconomics, pp. 45–218. Washington, D.C.: Brookings Institution.
14. Fuhrer, J. C. (1994). Optimal Monetary Policy and the Sacrifice Ratio. In Fuhrer, J. C. (Ed.). Goals, Guidelines, and Constraints Facing Monetary Policymakers, pp. 43–69. Federal Reserve Bank of Boston.
15. Financial Stability Board. (2014). Reforming Major Interest Rate Benchmarks. Retrieved from www.fsb.org/2014/07/r_140722/.
16. Barth, M., & Ramey, V. (2001). The Cost Channel of Monetary Transmission. NBER Macroeconomics Annual, 16, 199–255. doi.org/10.1086/654443
17. Moroz, A. M., Pukhovkina, M. F., Savluk, M. I. etc. (2005). Central bank and monetary policy. Kyiv: KNEU [in Ukrainian].
18. Soldatenko, V. (2004). From the history of the development of the banking system of the Federal Republic of Germany. Visnyk of the National Bank of Ukraine, 7, 58–63 [in Ukrainian].
19. Commission de Surveillance du Secteur Financier (CSSF). (n. d.). Retrieved from www.cssf.lu/de.
20. Melnyk, P. V., Taranhul, L. L., & Hordei, O. D. (2010). Banking systems of foreign countries. Kyiv: Alerta [in Ukrainian].
21. Constitution of the Republic of Poland. (1997, April 2). Retrieved from wipo.int/wipolex/en/text/194980.
22. Board of the National Bank of Ukraine. (2020). The main principles of monetary policy for 2021 and the medium-term perspective (Resolution, September 10). Retrieved from bank.gov.ua/ua/files/dzrtnZTXIlkICSQ [in Ukrainian].
23. Verkhovna Rada of Ukraine. (1999). About the National Bank of Ukraine (Act No. 679-XIV, May 20). Retrieved from zakon.rada.gov.ua/laws/show/679-14 [in Ukrainian].