employment and to smooth the balance of payments of the country according tothe Constitution of Ukraine (1996).Furthermore, as declared by NBU (2012), maingoal of Ukrainian monetary policy is to provide stability of the Ukrainian currency.However, economists insist on its concrete definition and quantitative specificationPetryk et al.
, 2008. Motivation of our research comes from the poor monetarypolicy performance due to high inflation level, high dollarization level, instabilityof financial market, price shocks, large foreign-capital inflows and non-transparentmonetary policy in Ukraine. These factors limit the ability of monetary policy authorityto use its main instruments.
Such neighboring countries as Czech Republic,Slovakia, Russia, and Hungary used to have similar problems, and implementationof inflation targeting regime proved to be efficient in dealing with them. In any case,priority of monetary policy should be price stability, while the choice of monetarypolicy regime depends on political and cultural factors, on economic institutions,and on the state history Mishkin, Schmidt-Hebbel, 2008.We test three main hypotheses in this thesis. First of all, we assume interest ratechannel in Ukraine to be ineffective due to the reasons we stated above and wesuppose that short-term national interest rates are not a sufficient tool for monetarypolicy to achieve price and financial stability. In other words, we want to understandhow effective are the main instruments of the monetary policy. Secondly, we examineif the exchange rate pass through is high in Ukraine as it is used to be in majorityof developing countries. Third, we assume that Ukrainian economic environment issignificantly influenced by Russian monetary policy.We employ structural vector autoregression model (SVAR) in our empirical analysis.
Block Structural VAR model with block exogenuity is used for estimation ofinfluence of the foreign shocks. We also put Russian economy variables in our foreignblock due to high dependency of Ukrainian economy on its mutual trade. Theobjective of the thesis is to assess the effectiveness of the main transmission channels