Effectiveness of Monetary Policy in Ukraine: Shedding Light on the Credit Channel

The objective of this paper is to estimate the response of the economy to the monetary policy shock taking into account three monetary transmission channels: the interest rate channel, the exchange rate channel, and the credit channel. Paper attempts to incorporate the credit market disturbances into a BSVAR model with zero and sign restriction by identifying three types of shocks: (i) lending supply shock, (ii) lending demand shock, and (iii) monetary policy shock. Also, two supplement BVAR models with Cholesky decomposition are used to test for the existence of the credit channel. This study shows that monetary policy transmission is effective in Ukraine and accounts for 15% of the GDP and CPI variance in a two-year horizon. The effect of the monetary policy shock on the GDP and CPI is estimated to peak at 11 and 24 months respectively. Also, the credit channel is estimated to be present in Ukraine and, hence, needs to be accounted for in the monetary policy decision making.