This paper measures a neutral interest rate in Ukraine by means of applying a Kalman filter to a semistructural model with unobserved components. We rely on a medium-term concept of a neutral interest rate, where it is defined as a real interest rate consistent with output at its potential level and inflation at its target level after the effects of all cyclical shocks have disappeared. Under this concept, and accounting for the small open nature of Ukrainian economy, the neutral interest rate is determined by the global economy's cost of capital and domestic long-term factors that influence risk-premium and changes in the real exchange rate. Conditional on long-term forecasts for output, demographic trends, real exchange rate changes and risk premium, the neutral rate is projected to decrease gradually from its 2.5% level as of the beginning of 2018 to 2% in real terms, or to 7% in nominal terms under a 5% inflation target. However, in the following years the gap between the National Bank of Ukraine's policy rate and the neutral rate should remain positive -reflecting the tight monetary stance needed to ensure stable disinflation. JEL Codes C32, E43, E52
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.
An important precondition for successful implementation of inflation targeting is the ability of the central bank to forecast inflation given the fact that the inflation forecast has become an intermediate target. Certainly, this means there should be clear understanding of the monetary policy transmission mechanism functioning within the bank, because it is precisely through transmission channels that a central bank has to ensure convergence of its inflation forecast to the target. And it is almost impossible to pursue inflation targeting without a set of macroeconomic models that describes the monetary policy transmission mechanism and helps to analyse the current state of the economy as well as forecast (simulate) short- and medium-term macroeconomic scenarios. This article provides a review of the current state of macroeconomic modelling at central banks and describes the history of development and actual stance of the National Bank of Ukraine’s system of macroeconomic models. The existing system provides quite reliable support for the current monetary policy decision-making process, but it has to be improved by implementing a more sophisticated model (such as a dynamic stochastic general equilibrium model) and enhancing the set of econometric models for shortterm forecast purposes in the future.
In May 2016, the National Bank of Ukraine (NBU) held its Annual Research Conference of the NBU on Transformation of Central Banking for the first time. Over 300 participants shared in the work of the representative international forum, including experts from central banks and international financial organizations, as well as representatives of the Ukrainian and international academic community. Issues discussed during the conference included the recent development trends of in central bankings, ranging from the monetary policy at low interest rates and under the threat of deflation, financial stability and management of capital flows, and the effect of new financial technologies and cultural features on the transition process in central banks.
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