Monetary transmission mechanism under martial law in Ukraine

Abstract

The article investigates the peculiarities of the monetary transmission mechanism (MTM) functioning during martial law in Ukraine. The study establishes its economic nature, determines the effectiveness of monetary transmission channels, analyzes the impact of wartime factors on the monetary and credit sphere, and evaluates the influence of the central bank's monetary decisions on the real sector of the economy.

Introduction. The object of the research is the Monetary Transmission Mechanism (MTM) of the National Bank of Ukraine (NBU), viewed as a complex system of economic interrelations that transmits the regulator's decisions to the financial market and the real sector of the economy. The key characteristics of the MTM are identified as its two-phase structure (impact on the financial market followed by the real sector), its multi-channel nature, the presence of time lags (up to 18 months in Ukraine), the capacity for managed shock smoothing, and its critical dependence on the stability of the banking system and trust in the regulator.

Problem Statement. The full-scale russian invasion on February 24, 2022, created an environment of extreme uncertainty, making reliable forecasting impossible and compelling the National Bank of Ukraine to adapt its monetary policy to crisis conditions. The primary problem lies in the decreased efficiency of traditional market-based MTM levers and the weakening influence of its channels on inflation under martial law.

Unresolved Aspects of the problem. The specific features of MTM functioning during active hostilities require further study. Debatable issues include the expediency of fiscal dominance (monetary financing of the budget), the consequences of prolonged administrative and currency restrictions, and the impact of digitalization and virtual assets on the transparency of monetary circulation and the efficacy of monetary constraints.

Purpose of the Article. The goal of the research is to analyze the characteristics, effectiveness, and transformation of Ukraine's monetary transmission mechanism channels under martial law, as well as to evaluate the impact of the NBU's monetary decisions on the real sector of the economy and macro-financial stability.

Presentation of the main material. The article explores the functioning of key transmission channels: interest rate, exchange rate, credit, asset price, and expectations channels. It analyzes changes in the NBU's operational design, specifically the transition from classic inflation targeting to a specialized format involving a fixed exchange rate and the implementation of stringent currency limits. Particular attention is paid to the dynamics of the UONIA (Ukrainian OverNight Index Average), deposit rates, and the yields on Domestic Government Bonds (DGBs) as instruments of monetary influence. It is established that the monetary decisions of the National Bank of Ukraine had both positive and restrictive consequences for the real sector of the economy under wartime conditions.

Conclusions. The results of the study demonstrate that monetary transmission during the war has become less market-oriented and more dependent on administrative controls and external aid. The exchange rate channel emerged as the most effective, serving as a "nominal anchor" for stability through the fixed rate. Meanwhile, the credit channel proved ineffective due to high risks, and the interest rate channel operates with significant time lags. The practical significance of the research lies in the substantiation that, despite deformations, the MTM enabled a reduction in inflation from 26.6% to nearly 5% and supported economic recovery in 2023, confirming its role as a central element of state economic policy under the risks of martial law.