Communication as an instrument for enhancing trust in a central bank: the case of Ukraine


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The relevance of trust in the central bank is determined by the rapid growth of the gap between the expectations of a regulator and market participants regardless of the reforms carried out by the NBU. Therefore, the need to use the “non-traditional” monetary policy instruments has enhanced the role of verbal interventions in the context of inflation targeting. The aim of the article is to ground that trust causes adequate rational behavior of the market participants in response to the central bank’s communication policy. The type of this research is an explanatory research method. As determined, trust is the necessary condition for the effectiveness of the central bank’s communication strategy and it favors the achievement of proclaimed objectives. It is established that although since 2014 the NBU activated verbal interventions as an additional instrument to anchor expectations, the increase of transparency does not prompt the trust because of the lack of confidence of citizens in the NBU and high level of stress in the domestic financial sector. It is emphasized that the pursuit of inflation targeting requires expanded communication to gather the expectations of economic agents. The NBU, in its communication policy concerning the economic climate, underlines devaluation expectations, the exchange rate and explanations on the discount rate. However, the deviation of expected enterprises’ exchange rate from the actual exchange rate, growing velocity of money circulation against the declining share of funds involved in the banking system, low monetization level and low penetration of financial services evidence the distrust in monetary policy.

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    • Figure 1. Interplay of trust and central bank policies’ effectiveness
    • Figure 2. Communication channels of central banks of developed countries
    • Figure 3. Central bank transparency index for Ukraine, 1998–2018
    • Figure 4. The Financial Stress Index for Ukraine, 2008–2018
    • Figure 5. Frequency of expressions in NBU’s Inflation Report, 2015–2018, numbers
    • Figure 6. Currency market information, 2014–2018
    • Figure 7. The dollarization level of loans and deposits of residents, 2006–2018, %
    • Figure 8. Expectations of business, 2014–2018, UAH per USD
    • Figure 9. Expected and actual 12-month inflation, 2016–2018, %
    • Figure 10. Investment funds’ (M3–M0) share in total money supply in Ukraine and peers, as at January 2019, %
    • Figure 11. Banking sector penetration indicators of Ukraine, %
    • Figure 12. Banking sector penetration indicators, Ukraine and peers, 2016, %