Top Economists and Policymakers Discuss Monetary Policy in Emerging Markets at NBU Workshop

On 27 November, the NBU held its regular workshop on Monetary Policy in Emerging Markets. The event focused on inflation targeting, a monetary regime that has stood the test of time and extreme conditions.

The workshop marked 35 years since inflation targeting was first applied, and a decade since it was adopted by Ukraine. During the event, high-level experts discussed lessons learned and prospects for monetary policy. 

The workshop’s keynote speaker was Sveriges Riksbank Governor Erik Thedéen. Sweden is known to be among the first countries ever to employ inflation targeting. The event convened representatives of the International Monetary Fund, the European Central Bank, the central banks of Ukraine, Armenia, and Poland, the Bank of England, the Ministry of Deregulation and State Transformation of Argentina, and the universities of York and Chile.

“Ukraine’s inflation-targeting regime has evolved into both a developmental tool and a pillar of stability in uncertain times. Since the full-scale invasion, we have found ourselves rerunning the test of this monetary regime’s resilience and flexibility under crisis conditions. Our experience shows convincingly that the monetary paradigm is shaped by challenges and that emergency conditions often accelerate its evolution,” NBU Governor Andriy Pyshnyy said as he opened the workshop.

Three major takeaways from the workshop:

Central bank independence lays the groundwork to pursue the price stability mandate

Governor Thedéen emphasized that central bank independence is at the core of inflation-targeting regimes. Designating an independent regulator to conduct monetary policy makes it easier to take unpopular yet necessary decisions that enhance confidence in the regulator’s capacity to achieve an inflation target.

Once gained, such independence should be continuously defended and never taken for granted. To this end, central banks must remain transparent and consistently show they have taken every step necessary to fulfill their mandate.

NBU First Deputy Governor Sergiy Nikolaychuk added that independence, trust, and clear justification of decisions are closely interconnected. This is why central banks must continuously enhance their communication policies, adhering to the principle of “do what you say and say what you do.”

Federico Sturzenegger, Minister of Deregulation and State Transformation of Argentina, noted that one of the factors behind the success of fiscal consolidation and deregulation in Argentina was the active and broad communication of the motto “society must understand why change is necessary.” As a former governor of Argentina’s central bank, he pointed out that central bankers are typically far more cautious in their communications, adding that this may be something worth reconsidering.  

Central banks need to be mindful of the scope and limits of their policy flexibility

Martin Sandbu (The Financial Times) said the global economy is currently facing far more supply-side shocks than previously anticipated. This requires monetary authorities to apply greater flexibility in their policy response.

“However, flexibility does not mean weakness. Flexibility means maturity,” said Governor Pyshnyy. He emphasized that in times of high uncertainty, it is important to strike the right balance between restraint and response, trust and flexibility, economic logic and reality.

Monetary policy cannot operate on autopilot. “Central banks should be ready to modify their views as conditions change,” said Governor Thedéen.

The results of a study presented by Matthieu Chavaz (BIS) show that central banks in emerging markets are increasingly employing more-flexible parameters of the monetary regime. Sergiy Nikolaychuk noted that finding the optimal balance without overburdening the economy has become one of monetary policy’s tasks.

Boris Hofmann (BIS) concluded that flexibility in central bank policy is necessary, but that it is important to avoid its excessive use and constant deviations from targets.

There is no contradiction between monetary and financial stability: both goals have a common denominator

The first and primary line of defense for financial stability is effective macroprudential regulation. It allows the regulator to contain systemic risks and strengthen the financial sector’s resilience. Yet it cannot be ruled out that monetary policy should also take into account risks to financial stability in the event of powerful shocks, especially if they can pose long-term threats to price stability.

Governor Thedéen pointed out that monetary policy has a direct impact on financial stability that cannot be ignored when developing policy. As imbalances in the financial system pose a threat to price stability, monetary policy can help counteract them.

“Our discussions have confirmed that the world is increasingly facing a more diverse set of risks, and that the likelihood of their materialization continues to grow. The workshop has also sent positive signals: central banks and the academic community are actively seeking ways to mitigate these risks and respond effectively to shocks. Central banks need such discussions to find effective mechanisms, refine monetary frameworks, and strengthen the resilience of the inflation-targeting paradigm in a world of heightened uncertainty,” said Sergiy Nikolaychuk in a recap of the event.

A video of the workshop is available on the NBU’s YouTube channel, and the speakers’ presentations and program can be found on the event’s special landing page.