Abstract

In this article it has been considered issue of impact, which goes from foreign exchange liberalization in Ukraine during 2016–2017, on hryvnia’s exchange rate volatility and its persistence. This step of National Bank of Ukraine was the one of the numerous in a sequence of steps in direction of realization policy of inflation targeting and measure in supporting meeting price stability target, including foreign exchange rate stability. In transitive economies foreign exchange liberation permanently associates with foreign exchange and financial instability and, thus, monetary authorities keep in their instrumental range tough instrument of direct control, for instance intervention. Although, with taking into a responsibility of keeping price stability mandate above mentioned instruments will stand in a conflict with this target and it makes Central Banks to use a limited sterilized intervention only with aim to smooth volatility of foreign exchange rate, but not a determination of one. Also, among scientists a discussion on how does foreign exchange liberation contemporaneously with pursuing inflation targeting effective in reducing volatility of foreign exchange rate and maintaining price stability is still strong and have not yet clear answer. Therefore, authors have formulated two assumptions in line with much more sensitivity of economic agents’ expectations channel transmission to foreign exchange rate, which strengthen by channel of international reserves comparatively to case if central bank would be solely use a conducting of sterilized intervention. In addition, the hypothesis on that foreign exchange liberalization promotes exchange rate stability was established. For proving these assumptions, it has been employed vector autoregression modelling approach to building monetary transmission mechanism in Ukraine. The impulse response function for two models’ modification was built and factor decomposition of innovations, which have made contribution on foreign exchange volatility strengthening was assessed and proposed to consideration. One of the model specifications has accounted influence of sterilized intervention on foreign exchange volatility and interest setting mode. In a result we concluded, that outlined above hypothesis are credible accordingly to empirical assessments and it gave an alternative direction in a way of making plausible recommendation for conducting monetary policy in Ukraine.

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