Monetary policy during the wartime: How to ensure macroeconomic stability

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In peacetime, the main contribution of monetary policy to macroeconomic stability is to ensure the stability of price dynamics through regulating money supply. During the war, the market principles of the economy and the formation of its prices are violated, monetary transmission mechanisms do not work adequately, the role of the state in ensuring the proper functioning of commodity-money relations increases. Therefore, the purpose of this paper is to generalize approaches to the formulation of monetary policy during the wartime and to substantiate the relevant recommendations for contemporary situation in Ukraine. Theoretical sources, advisory and research materials of international organizations and national macroeconomic regulators, statistical databases were used to achieve the stated aim. The generally accepted principle of modifying monetary policy during the wartime is the use by the central bank of instruments that expand the money supply – purchasing assets on the open market, outright purchase of government bonds on the primary market, special targeted refinancing of credit institutions. The paper suggest the design of the monetary regime of the war period, which provides for the modification of such aspects of the central bank performance as the target of monetary policy, the composition of interest rates on basic operations of the central bank, foreign exchange market regulation and regulation of capital flows, the relationships of the central bank and fiscal authority. It is argued that in the conditions of military economy, the main contribution of monetary policy to macroeconomic stability is achieved through ensuring the stable functioning of the government borrowing market and controlling capital flows.

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    • Figure 1. Targets of monetary regimes in 2020
    • Figure 2. M3 in Ukraine, as % of February 23, 2022 (beginning of the war)
    • Figure 3. Financing of the fiscal deficits in the USA and Ukraine, % of the total
    • Table 1. Interest rates and maturities of government bonds during World War II
    • Table 2. Monetary policy tools for extraordinary conditions
    • Table 3. Comparison of the US and Ukrainian monetary policy tools during the war
    • Conceptualization
      Bohdan Danylyshyn
    • Data curation
      Bohdan Danylyshyn, Ivan Bohdan
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