The Effectiveness of the Monetary Transmission Mechanism in Ukraine since the Transition to Inflation Targeting

Abstract

This paper analyzes the effectiveness of monetary transmission channels in Ukraine since the National Bank of Ukraine (NBU) transitioned to inflation targeting and after the central bank established its new approach to monetary policy implementation. The authors conclude that the central bank has sufficient control over short-term interest rates in the interbank market and that it uses them to influence other financial market indicators. At the same time, further transmission via the interest rate channel is constrained by weak lending and the banking system’s slow post-crisis recovery. The exchange rate channel remains the most powerful avenue of monetary transmission. After the NBU switched to a floating exchange rate and an active interest rate policy, its key rate became a means of influencing exchange rates. The exchange rate channel’s leading role is expected to gradually decrease but remains important, as is typical for small open economies.