On the effectiveness of the interest rate channel within inflation targeting in Ukraine: a VAR approach


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Assessing the effectiveness of the inflation targeting framework via the interest rate channel remains crucial in the current monetary policy debate. For Ukraine, the relevance of this discussion is enhanced by the adoption by the National Bank of a rigid inflation targeting policy since 2016, as well as by the challenges of price stability during war. The aim of the study is to identify how the discount rate affects the money market rates and how this affects inflation in Ukraine. Employing a VAR model on monthly data spanning 2016 – Q1 2022, the analysis demonstrates weak empirical evidence for the interest rate channel effectiveness. The impulse response indicates that the discount rate’s initial effect does not provide long-term inflation dynamics control. Variance decomposition analysis highlights the minimal influence of the NBU’s discount rate, primarily evident in the refinancing rate, followed by its impact on the rate of term deposits made by individuals, followed by the inflation, followed by the rate of new loans granted to residents, and finally the rate of government bond yields. Addressing the limitations of a rigid inflation targeting approach, the study recommends adopting a balanced approach, considering both price stability supported by exchange rate control measures and fostering economic growth. Additionally, a viable strategy for deepening the financial sector should be developed.

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    • Figure. 1. CPI and the NBU’s discount rate, 2015–2023
    • Figure 2. Impulse responses of money market rates and inflation to the change in the discount rate
    • Figure A1. Stability test
    • Table A1. ADF unit root test
    • Table A2. Lag order selection criteria
    • Table A3. Lag exclusion Wald test
    • Table A4. Residual serial correlation LM tests
    • Table A5. Granger causality test
    • Table A6. Vector autoregression estimates
    • Table A7. Variance decomposition analysis
    • Formal Analysis
      Yevhen Bublyk
    • Investigation
      Yevhen Bublyk, Yuliia Shapoval
    • Project administration
      Yevhen Bublyk
    • Validation
      Yevhen Bublyk
    • Writing – original draft
      Yevhen Bublyk, Sergiy Korablin
    • Conceptualization
      Sergiy Korablin
    • Supervision
      Sergiy Korablin
    • Visualization
      Sergiy Korablin
    • Data curation
      Yuliia Shapoval
    • Methodology
      Yuliia Shapoval
    • Writing – review & editing
      Yuliia Shapoval