Last week a public research seminar was held at the National Bank of Ukraine. During this seminar, Mr Oleksandr Faryna, a leading specialist at the Research Division of the NBU Monetary Policy and Economic Analysis Department, presented the findings of his paper entitled “Nonlinear Exchange Rate Pass-Through to Domestic Prices in Ukraine”.
In his paper, Mr Faryna assesses the pass-through from nominal exchange rate movements to consumer prices in Ukraine. The research findings suggest that the magnitude of the pass-through effect hinges on the size and direction of exchange rate movements.
First, the pass-through effect to core inflation from depreciation is higher than from appreciation. This can be attributed to a high degree of market monopolization. In the competitive environment, where producers compete for a market share, domestic prices are more responsive to exchange rate appreciation than to depreciation. However, in the context of weak competition a foreign exporter plays a key role in shaping prices in the domestic market of importing countries. In case of the importer's currency appreciation foreign exporters tend to adjust their price markups, which enables them to keep prices unchanged while increasing profit margins. In contrast, the importer's currency depreciation encourages a foreign producer to rise prices to avoid losses.
Second, price responsiveness to small, medium, and large exchange rate changes is different. Prices are sensitive to small and extremely large changes, but the pass-through effect is insignificant if exchange rate movements are moderate. Thus, the research findings provide yet another argument in favor of the NBU’s decision to adopt an inflation targeting regime which is characterized by moderate exchange rate fluctuations.
To read the Ukrainian version of the paper published in the latest issue of the research journal “Visnyk of the National Bank of Ukraine” follow the link.
The video of the seminar is available.
The NBU launched a series of research seminars for academia experts and researchers in July 2015. Six seminar has been held since them.
With the aim of arranging further research seminars, we encourage potential contributors to collaborate with us and present their research findings on issues related to the activities of the NBU and the financial system operation. Please send proposals (with an indication of a suitable date for the seminar, and attached presentation materials, an executive summary and/or draft contributions) to the NBU Research Division of the Monetary Policy and Economic Analysis Department for consideration via e-mail at the following addresses: [email protected], [email protected]).