Now we have not only a stable anti-war coalition, but also the support of central banks in many countries of the world. Their own experience in overcoming crisis phenomena should be taken into account when solving problematic issues in Ukraine.

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Stabilization instruments of central banks depend on the nature of the economic crisis. In the context of the financial crisis, the unconditional priority of the central bank is to ensure the stable functioning of the financial sector. In the context of a structural crisis (for example, provoked by a pandemic or war), the priority is to create conditions for the saturation of critical segments of the real economy and public finances with money. Therefore, with such a policy, the conditions for monetary regulation of the economy are softened, lending, asset purchases, preservation and creation of jobs are supported.. Strengthening cooperation with the government on the stable functioning of the government borrowing market and controllability of capital movements.

This means that the design of the monetary regime for periods of structural breakdowns in the economy may involve modification of the following parameters:.

target orientation of monetary policy;

level and composition of interest rates;

level of harmonization of monetary policy decisions with fiscal policy priorities;

exchange rate regime;

control over cross-border movement of capital.

The traditional goal of central banks is to reduce and stabilize inflation. The ability to influence inflationary dynamics is determined by the impulses that this bank is able to send to other sectors of the economy through financial markets and the banking system. But during structural crises, the process of impulse transmission is disrupted, as the traditional business ties of the economy are broken, the process of creating added value is disrupted, chain bankruptcies and mass unemployment occur, in fact, the circulation of money in the economy is hindered.. That is why central banks during structural economic crises direct their main efforts to stimulate lending and other channels of money flow into the economy, so they restore a healthy circulation of money in the economy, which in turn restores the ability of central banks themselves to achieve conditions of price stability..

With the onset of the global recession in 2020, the central banks of developed countries, in order to support demand and revive lending, lowered key interest rates, bought public and private assets, expanded lending to financial institutions, and stimulated targeted lending (Funding for Landing).

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During the pandemic, monetary policy was significantly eased in emerging markets as well (Emerging Markets, EM). According to the IMF and the World Bank, the reduction of key interest rates was applied by the central banks of more than 90% of the EM countries, the purchase of government bonds - 60, the support of bank liquidity - 60, the purchase of real sector assets - 25% of countries. Numerous studies show that in EM countries such programs have helped stabilize financial markets, ease financing conditions for local businesses, and support lending..

Active distribution of concessional debt financing to commercial banks or other financial institutions from the central bank for further issuance of targeted loans to businesses or the public is another common step. According to the Bank for International Settlements, such programs have been applied in 14 countries of the world, including five EM countries - Brazil, Mexico, South Africa, India, Malaysia. The target sector of this tool was small and medium-sized businesses (75% of programs). A third of the programs involved government-guaranteed loans, with an average program size of 4% of GDP and an average loan term of four years.

Among 46 emerging market economies, 40 have adopted some form of atypical monetary policy. In some countries (Hungary, Chile), the increase in the balance sheets of central banks reached more than 15% of GDP.

Immediately after the end of the COVID shock, the global economy faced a new challenge: rising energy and food prices, combined with supply chain disruptions amid high uncertainty over the consequences of the pandemic and the war in Ukraine, caused inflationary pressures in both developed countries and the EM countries. This affected the growth of inflation, the causes of which are not related to excessive income and demand..

Thus, the former head of the Central Bank of Switzerland, Philipp Hildebrand, in the article The old inflation playbook no longer applies, argues that the post-pandemic surge in inflation in the world is caused not by excessive demand, but by “bottlenecks” in supply.. In his opinion, this should change the traditional macroeconomic attitudes and approaches to conducting monetary policy.. In such an environment, central banks need to accept higher inflation rather than implement instruments that will restrict economic activity and reduce demand..

Nobel laureate Joseph Stiglitz, in his article A Balanced Response to Inflation, notes that in the current environment, drastic measures to raise interest rates may have some effect on inflation, but at the same time they will significantly harm economic growth and human well-being.. In his opinion, policies aimed at unblocking supply bottlenecks will be more useful in countering inflation and mitigating its consequences for society..

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High inflation is now a global phenomenon. In 2021, half of the developed and two-thirds of the developing countries saw annual inflation exceed the 5 percent mark. In 2022, the EM countries of Eastern Europe averaged 16.1% inflation.

Exceeding the inflation targets of central banks by several times is observed in all countries without exception with an inflation targeting regime. But the response of central banks has been largely subdued, with key interest rates generally rising but remaining below annual inflation rates..

The balance of the reaction is explained by an attempt to support the credit process, as well as to protect the economies of their countries from unnecessary structural breaks - bankruptcies, defaults and unemployment. In particular, among the EM countries of Eastern Europe, the best effects on the labor market were achieved in Poland and the Czech Republic, where the level of lending to the economy increased to 60 and 70% of GDP, and the unemployment rate fell to 2.9 and 2.4%, respectively..

At the same time, the NBU policy is carried out with a greater emphasis on the problem of inflation than on structural threats from unemployment or bankruptcies.. Since June 3, 2022, the key rate has been increased by 2.5 times - from 10 to 25% per annum, while the projected inflation for 2023 is 18.7%. Thus, the NBU sent a signal to the markets that it will try to narrow the money supply to the economy in order to minimize inflationary risks that could arise in the event of a reversal of bank lending activity or excessive consumer demand from the population..

What conclusions from the modern world experience in the activities of central banks can be useful for Ukraine?

First, war and structural crisis exacerbate the problem of financial intermediation. A critical lack of liquidity in public finances and the real sector may be accompanied by its excess in the banking system. This requires a revision not only of the level of monetary strictness, but also of the operational design of monetary policy and instruments for regulating bank liquidity..

Secondly, the stabilization set of monetary policy tools of a modern central bank is much wider and includes:

operating the level of the borrowing rate, using programs for the purchase of public and private assets, using tools for targeted stimulation of bank lending activity, and easing the requirements for financial regulation of lending activities..

Thirdly, monetary policy can only stabilize a crisis economy if its measures help expand the flow of money supply to critical segments of the real economy and public finance, and not vice versa..

Read more articles by Bogdan Danylyshyn at the link.

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