Data-driven approach to the coordination of monetary and fiscal policy amid war

Abstract

This paper investigates the problem of the interrelationship and coordination of fiscal and monetary policies in Ukraine under martial law. The aim of the study is to evaluate the effectiveness of macro-financial regulation and identify contradictions between the government's objectives and the central bank's strategy. Based on a data-driven approach using econometric modeling methods, the non-linear nature of the monetary transmission mechanism is quantitatively proven. The research results indicate that the critical threshold of the key policy rate, beyond which the elasticity of lending to the economy acquires persistently negative values, is at the level of 16.5%. It is proven that the prolonged maintenance of a strict contractionary policy by the National Bank of Ukraine has caused a massive crowding-out effect: over 61% of the banking sector's net assets are accumulated in risk-free government instruments (domestic government bonds and certificates of deposit). This distorts the fundamental function of financial intermediation and generates negative fiscal consequences, exponentially increasing budget expenditures on state debt servicing. The paper substantiates the necessity of transitioning to an optimal scenario of coordinated state regulation that combines fiscal consolidation - controlling expenditures and debt dynamics - with monetary expansion - gradually reducing interest rates. This is essential to replenish the budget and prevent financial resources from operating exclusively within the closed boundaries of the financial sector, as is currently the case in Ukraine.