THE IMPACT OF FOREIGN EXCHANGE MARKET LIBERALIZATION ON VOLATILITY OF HRYVNIA

Abstract

In this article, it has been considered the 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 infl ation targeting and measure in supporting meeting price stability target, including foreign exchange rate stability. Intransitive economies foreign exchange liberation permanently associates with foreign exchange and fi nancial 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 confl ict with this target and it makes Central Banks use a limited sterilized intervention only with the 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 the volatility of foreign exchange rate and  maintaining price stability is still strong and have not yet a clear answer. Therefore, authors have formulated two assumptions in line with much more sensitivity of economic agents’ expectations channel transmission to the foreign exchange rate, which strengthens by the channel of international reserves comparatively to the case if the central bank would 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 modeling approach to building monetary transmission mechanism in Ukraine. The impulse response function for two models’ modifi cation was built and factor decomposition of innovations, which have made a contribution to foreign exchange volatility strengthening was assessed and proposed to consideration. One of the model specifi cations has accounted the infl uence of sterilized intervention on foreign exchange volatility and interest setting mode. As a result, we concluded, that outlined above hypothesis is credible accordingly to empirical assessments and it gave an alternative direction in a way of making a plausible recommendation for conducting monetary policy in Ukraine.