Regular version of site
Skip to content
NBU Workshop Summary: Commitment to Price Stability Mandate Reinforces Central Bank’s Capacity to Ensure It

NBU Workshop Summary: Commitment to Price Stability Mandate Reinforces Central Bank’s Capacity to Ensure It

On 25 November, the National Bank of Ukraine hosted the Workshop Inflation Targeting in a World of Large and Persistent Shocks. This year, the event was organized in cooperation with the Euro Area Business Cycle Network (EABCN).

The event was attended by 140 representatives from different countries. The speakers were representatives of central banks, academia, international financial institutions, and research centers from Ukraine, Poland, the United States, the Czech Republic, Germany, Spain, Colombia, Georgia, and other countries.

The panelists discussed the specifics of the effective implementation of the inflation targeting policy in a period of large and persistent shocks to the global economy caused by the COVID-19 pandemic and the full-scale russian aggression against Ukraine.

“For the first time in four decades, the world is facing risks of the simultaneous occurrence of persistently high inflation and a global economic slowdown. Despite being country-specific, these challenges often have much in common. This is especially true for emerging markets. This is why, now more than ever, it is important that we share our experiences and seek solutions to key issues together.

Although Ukraine is facing additional challenges today as it fights back against russia’s full-scale military aggression, we as policymakers face common challenges of revitalizing the transmission channel and striking a balance between fiscal and monetary policies amid varying credibility. What unites us even more is our unwavering mandate, which is to ensure price stability,” noted Andriy Pyshnyy, NBU Governor, during his opening speech at the Workshop.

Here are key conclusions made by the speakers at the NBU workshop:

A consistent monetary policy and its stable credibility are prerequisites for effective monetary transmission

Considering the uncertainty due to aftermath of the COVID-19 pandemic, and also the monetary policy normalization of advanced economies, the effectiveness of the monetary policy transmission mechanism of emerging markets is decreasing. In particular, the weakened currency transmission channel and the expanded dollarization of the economy force central banks of said countries to implement a more assertive monetary policy.

Tomáš Holub (Czech National Bank) shared his experience of executing monetary policy in Czech Republic and noted that the monetary policy transmission channel, regardless of the hurdles, is effective due to the consistency and stable credibility of the policy.

In its turn, Shalva Mkhatrishvili (Bank of Georgia) outlined key features of applying macroprudential policy tools to alleviate the negative impact of economy dollarization on the transmission mechanism.

Global practice shows that it is the consistency of the monetary policy and application of additional instruments of the macroprudential policy that promote the effectiveness of the transmission mechanism.

Maintaining balance between fiscal and monetary policies is important for macrofinancial stability

Optimal balance between fiscal and monetary policies enables macrofinancial stability in the short- and mid-term, as well as creates the foundation for stable economic growth in the future.

In contrast, the excessive accumulation of imbalances in fiscal policy, and fiscal dominance even more so, leads to chronic inflation poisoning the economy and to a financial crisis that eventually forces central banks to implement a tight monetary policy to curb inflationary pressure. Under said conditions, the implementation of both fiscal and monetary mandates by regulators becomes significantly limited.

Paulo Medas (International Monetary Fund) noted that the fiscal policy should be ready to actively counteract short-term shocks, while having a transparent and feasible anchor in the mid-term.

The goal of the inflation targeting policy is to manage inflation expectations of economic agents

In his keynote presentation, Yuriy Gorodnichenko (University of California, Berkeley) reviewed in detail the modern understanding of formation and management of inflation expectations.

Gorodnichenko said that expecting a high and unpredictable inflation rate is always a bad sign for consumers and business, and hence for the economic activity in the country. For that reason, central banks should use all means to communicate their commitment to the price stability mandate. This will promote anchoring of expectations and, respectively, foster mandate implementation.

For preserving the credibility of inflation targeting, the commitment to price stability is important

In this aspect, the credibility of systematic and persistent central bank’s policy becomes crucial. Federico Sturzenegger (John F. Kennedy School of Government) noted that deviation from inflation-targeting benchmarks may be excusable, while deviation from the mandate of ensuring price stability destroys credibility and greatly undermines the capability of the central bank to ensure macrofinancial stability.

In his closing speech, Sergiy Nikolaychuk (NBU) emphasized that the NBU, regardless of the full-scale war, does not relinquish its mandate of ensuring price and financial stability and intends to resume the conventional inflation targeting policy as soon as the necessary macroeconomic conditions present themselves.

For more on the Workshop, speaker presentations and speeches, as well as the video of the event, go to the designated website.

Subscribe for notifications

Subscribe to news alerts