Balancing Monetary Policy in Defence Economics in Ukraine

Abstract

The russian federation's launch of a full-scale war against independent Ukraine on February 24, 2022, has presented unprecedented challenges to the country. In addition to resistance on the battlefield, Ukraine must implement adaptive macroeconomic policies to address the situation. This combination of military and economic efforts not only prevents economic collapse but also maintains fragile macroeconomic stability during wartime. Monetary stability becomes especially important, highlighting the absolute necessity for effective implementation of monetary policy.This article aims to identify the key characteristics of Ukraine's defence economy and forecast key policy rates and exchange rates during the war.The prerequisite for forecasting was the analysis of endogenous and exogenous factors determining the current state of the Ukrainian economy: index of business expectations in Ukraine and partner countries, state of international trade and balance of payments, disparities in the labour market, reorientation of the state budget to military needs, devaluation of the national currency, high inflation, increase of financial capital price.Modelling is based on consumer price index (CPI), household inflation expectations, key policy rate of the National Bank of Ukraine, real and nominal effective exchange rates hryvnia to USA dollar, gross and net international reserves, gross and net foreign exchange market interventions, the UK CPI, the USA CPI, EU CPI, and the weighted average yield of domestic government bonds. The methodology involved the use of the VECM model (Vector Error Correlation Model) and the Bagging machine learning method, adapted to time series. Using this methodology enabled an accurate forecast of the key policy rate. In determining the optimal exchange rate, a modified formula was used that takes into account the monetary base, total bank deposits, foreign currency deposits in banks, exchange rate in the black market, and international reserves. This modification enabled the prediction of an exchange rate that closely approximates the official exchange rate.