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Improving the theoretical foundations of conducting
monetary policy
Anora GULYAMOVA
1
Tashkent branch named G.V. Plekhanov Russian University of economics
ARTICLE INFO
ABSTRACT
Article history:
Received April 2021
Received in revised form
28 April 2022
Accepted 20 May 2022
Available online
10 June 2022
The article shows the Monetary policy goals traditionally
include price stability, founded economic growth, full
employment, smoothing business cycles, preventing financial
crises, and stabilizing interest rates and exchange rates. At the
present stage, the currencies exchange rate is actively
supported through operations in the foreign exchange market,
which is confirmed by the large-scale accumulation of
international reserves of the Bank of Uzbekistan. In the absence
of sterilization mechanisms, such a practice inevitably leads to
inflation, since a huge mass of soums flows into the market, the
growth of which in many respects exceeds the growth of the
economy as a whole.
2181-
1415/©
2022 in Science LLC.
https://doi.org/10.47689/2181-1415-vol3-iss5/S-pp195-199
This is an open access article under the Attribution 4.0 International
(CC BY 4.0) license (https://creativecommons.org/licenses/by/4.0/deed.ru)
Keywords:
inflation,
banking system,
transaction economy,
improving.
Pul-kredit siyosatini olib borishning nazariy asoslarini
takomillashtirish
ANNOTATSIYA
Kalit so‘zlar
:
inflyatsiya,
bank tizimi,
tranzaksiya iqtisodiyoti,
takomillashtirish.
Maqolada pul-
kredit siyosatining maqsadlari, an’anaviy
ravishda narxlar barqarorligi yoritilgan, iqtisodiy o‘sish asoslab
berilgan hamda to‘liq bandlik, biznes sikllarini
yumshatish,
moliyaviy inqirozlarning oldini olish, foiz stavkalari va valyuta
kurslarini barqarorlashtirishni o‘z ichiga oladi. Hozirgi
bosqichda valyuta kursi valyuta bozoridagi operatsiyalar orqali
faol qo‘llab
-
quvvatlanmoqda, bu O‘zbekiston bankining xa
lqaro
zaxiralarining keng miqyosda to‘planishi bilan tasdiqlanadi.
Sterilizatsiya mexanizmlari mavjud bo‘lmagan taqdirda, bunday
amaliyot muqarrar ravishda inflyatsiyaga olib keladi, chunki
bozorga juda katta miqdordagi so‘m tushadi, ularning o‘sishi
ko‘p jihatdan butun iqtisodiyotning o‘sishidan oshadi.
1
Elder teacher at the department International economy, In Tashkent branch named G.V. Plekhanov Russian
University of economics. E-mail: mutabarchik@mail.ru.
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Совершенствование теоретических основ проведения
денежно
-
кредитной политики
АННОТАЦИЯ
Ключевые слова:
инфляция,
банковская система,
трансакционная
экономика,
совершенствование.
В статье показано, что цели денежно
-
кредитной
политики традиционно включают в себя ценовую
стабильность, оценивает экономический рост, полную
занятость, сглаживание деловых циклов, предотвращение
финансовых кризисов, а также стабилизацию процентных
ставок и валютных курсов. На современном этапе курс
валют активно поддерживается за счет операций на
валютном рынке, что подтверждается масштабным
накоплением международных резервов Банка Узбекистана.
При отсутствии механизмов стерилизации такая практика
неизбежно приводит к инфляции, поскольку на рынок
утекает значительная сумма сума, повышение которого во
многом превышает рост экономики в целом.
INTRODUCTION
According to the conventional wisdom, the goal of any Central Bank is to maintain
price stability, since high price growth impedes sustainable economic growth by
distorting the decision-making process. If this problem is particularly relevant for the
state, then the Central Bank can import price stability by pegging the exchange rate of the
national currency to the currencies of countries that have succeeded in fighting inflation.
This method was extremely successful in the 1990s and, among other things, was used in
Russia. However, it turned out to be very vulnerable, which led many countries to
abandon fixing their currencies and pursue an independent monetary policy.
An alternative to exchange rate targeting is inflation targeting, and the use of this
particular strategy has brought some price stability to developed countries. Developing
countries followed suit, and already in 1999 inflation targeting was introduced in Brazil,
later in Hungary and in other countries. Now the introduction of this mechanism is being
discussed in Russia.
Based on the currently dominant economic theory, the principle of inflation
targeting, like any independent monetary policy, is in conflict with the desire of Central
Banks to stabilize exchange rate fluctuations. The so-called
“
Impossible Trinity
”
argues
that a central bank cannot simultaneously pursue an independent monetary policy and
regulate the exchange rate if the economy seeks to be completely open to international
capital flows.
At the present stage, the ruble exchange rate is actively supported through
operations in the foreign exchange market, which is confirmed by the large-scale
accumulation of international reserves of the Bank of Russia. In the absence of
sterilization mechanisms, such a practice inevitably leads to inflation, since a huge mass
of rubles flows into the market, the growth of which in many respects exceeds the growth
of the economy as a whole.
These trends led to the appearance of this work. Its purpose is to prove the
inflationary pressure of foreign exchange interventions carried out by the Bank of Russia.
In accordance with the goal set during the study, several tasks were set:
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LITERATURE REVIEW.
Monetary policy goals traditionally include price stability, economic growth, full
employment, smoothing business cycles, preventing financial crises, and stabilizing
interest rates and exchange rates. Some goals are compatible with each other, while
others are not. For example, the goal of price stability often conflicts with the goal of
stable interest rates and maintaining full employment. Countries may assign equal
weights to these targets, but there has been an increasing emphasis recently on keeping
inflation low. This trend is due to empirical observations that high inflation (which is
often associated with its volatility) distorts the decision-making of economic agents
regarding the volume of investment, savings and production, thus leading to slower
economic growth (see, for example, Fischer 1993).
Therefore, the widely held view is that the goal of monetary policy is to maintain
stable prices. Alan Greenspan, the former head of the Fed, proposed the following
indicator:
“
price stability is observed when economic agents do not take into account the
factor of a possible price increase when making decisions
”
. In the language of statistics,
this definition corresponds to a single-digit inflation indicator (Greenspan, 1994).
METHODOLOGY AND ANALYSING
One of the most common mechanisms for maintaining price stability is inflation
targeting. In contrast to alternative strategies
–
targeting the money supply or the
exchange rate, which only indirectly support low inflation
–
this approach involves direct
management and regulation of inflation. There are several different definitions of
inflation targeting in the literature, but they all come down to highlighting only two key
characteristics of this mechanism:
1. The Central Bank has an obligation to achieve a certain, expressed in numerical
form, annual inflation rate. Moreover, this goal is a priority over all the others set by the
Central Bank. Its numerical expression helps to communicate to the general public the
level of inflation that the monetary authority considers normal.
2. Moreover, forecasting inflation is actually also the goal of the Central Bank,
albeit an intermediate one. Therefore, inflation targeting is also sometimes referred to as
inflation forecast targeting. Since part of the price level in the short run is predetermined
(due to price inflexibility and the presence of rigid wages), the Central Bank can actually
only influence the expected future inflation. By conducting operations in the money
market, the Central Bank adjusts the expected inflation in accordance with the target.
Opponents of this mechanism argue that it brings many benefits compared to
other strategies:
1. Inflation targeting helps to increase confidence in the monetary authority and
more clearly form inflation expectations. It communicates to the public that monetary
policy is aimed at keeping inflation low. Moreover, inflation targets are much more
understandable and transparent than other targets, since they do not change over time
and are controlled by the National Bank. Thus, inflation targeting contributes to a clearer
understanding and assessment of the economic situation in the country than more
complex and non-transparent mechanisms.
2. Inflation targeting is more flexible. Since the calculation of inflation requires a
certain time, the target value of inflation is determined in the medium term. This implies
that the Central Bank pursues an inflation target for a certain time horizon by adjusting
inflation expectations. Short-term deviations of inflation from target values are normal
and do not necessarily result in a loss of confidence in the monetary authority.
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3. Inflation targeting leads to lower costs when the goal is not achieved. The costs
of policy failure by the Central Bank under some alternative mechanisms, such as
exchange rate targeting, can be significant
–
extensive loss of foreign exchange reserves,
high inflation, financial and banking crises, and even default. In contrast, the costs of a
failed fight against inflation are limited to inflation itself and a lower level of economic
growth than planned (because when inflation exceeds its target level, the Central Bank
raises the interest rate).
Positive trends in the banking sector of Uzbekistan emerged in 2016. However,
state-owned banks remain the main source of the negative result of the national banking
system in Uzbekistan.
Commercial banks with state-owned assets still have a high proportion of funds
received from the government.
Thus, the banking system of the Republic of Uzbekistan is characterized by high
concentration: 84% of all bank assets are still owned by banks with state shares, and
64% belong to five state-owned banks (National Bank, Asaka Bank, Promstroy Bank,
Ipoteka Bank and Agrobank). The share of deposits of banks with a state share in relation
to loans is 32.9%. For comparison, in private banks this figure is about 96%.
Individual deposits account for only 24% of total deposits in the banking system,
which is about 5% of GDP. One of the most important tasks today is to attract the
population
’
s savings to the banking and financial systems.
In 2018-2020, the number of credit organizations increased to 55, including
4 commercial banks (Poytakht Bank, Tenge Bank, TBC Bank, Anor Bank), microcredit
organizations to 33 and pawnshops to 18.
As of January 1, 2021, the assets of commercial banks reached $34.4 billion
(366.1 trillion soums), an increase of 120% compared to 2017. During this period, the
average annual real growth (excluding devaluation) amounted to 24.1%.
As a result of the liberalization of the monetary policy, the level of dollarization in the
banking sector has significantly decreased. In particular, in 2017, the share of foreign currency
assets of banks in total assets was 64%, and in 2020 this figure dropped to 50.2%. Also during
this period, the share of loans in foreign currency decreased from 62.3% to 49.9%, and the
share of deposits in foreign currency decreased from 48.4% to 43.1%.
The real growth of loans averaged 38.6% per annum. As of January 1, 2021, the
total volume of loans issued to the economy amounted to $26.06 billion (277 trillion
soums) and increased by 150% compared to 2017.
The average annual real growth rate of deposits over this period amounted to 18.5%.
CONCLUSION
In any open economy, the monetary authorities are faced with an even more
serious problem, which is called the "Impossible Trinity" (Impossible Trinity). Roughly
speaking, this theory argues that a central bank cannot simultaneously pursue an
independent monetary policy and regulate the exchange rate if the economy seeks to be
perfectly open to international capital flows. This problem is illustrated in Figure 1.1.
It is possible to reformulate the above-stated "theorem" in another way. Three
goals cannot be achieved simultaneously: exchange rate stability, capital market
integration, and monetary policy independence. Any pair of these goals can be achieved
by pursuing a certain policy, however, this requires the rejection of the third goal. For
example:
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1. The goals of exchange rate stability and free convertibility of the national
currency can be combined through a fixed exchange rate policy, which will require the
Central Bank to abandon the implementation of an independent monetary policy. His
policy of managing the interest rate will be reduced to maintaining a fixed exchange rate,
and not to achieving internal equilibrium goals.
2. Independence of monetary policy and free convertibility of the national currency
can be achieved through a floating exchange rate, which will lead to its volatility. The
Central Bank can freely vary the interest rate, focusing, for example, on reducing
inflation, but at the same time it will have to be content with the exchange rate that the
market sets.
3. The stability of the exchange rate can be achieved with the independence of
monetary policy, however, for this, the Central Bank must sacrifice the free convertibility
of the national currency. In the presence of significant restrictions on the capital market,
the relationship between the interest rate and the exchange rate is violated.
However, the question of the existence of intermediate options may arise here. Can
the Central Bank, with capital mobility, partially regulate the exchange rate and have
partial independence of monetary policy? This question disappears by itself when the
case of the Central Bank realizes its goals in the pursuit of both policies. If he sets himself
the goal of reducing inflation, he must also subordinate currency regulation to it, and vice
versa. Without a clear idea of the desired trajectory of movement in any area, the Central
Bank will not be able to come into conflict with anything at all, as well as to obtain
satisfactory results.
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