Can central banks be heard over the sound of gunfire?

• Published date: 01 December 2023
• Author: Ge Gao,Alex Nikolsko‐Rzhevskyy,Oleksandr Talavera
• Date: 01 December 2023
• DOI: http://doi.org/10.1111/jfir.12358

Received: 14 October 2023

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Accepted: 23 October 2023

DOI: 10.1111/jfir.12358

ORIGINAL ARTICLE

Can central banks be heard over the sound

of gunfire?

Ge Gao

1

|Alex Nikolsko‐Rzhevskyy

2

|Oleksandr Talavera

3

1

Beijing Sport University, China

2

College of Business, Lehigh University,

College of Business, USA

3

Birmingham Business School, University of

Birmingham, UK

Correspondence

Oleksandr Talavera, Birmingham Business

School, University of Birmingham, UK.

Email: o.talavera@bham.ac.uk

Abstract

In this study, we examined the effectiveness of central

bank communications during times of significant adverse

shocks. Specifically, we examined how the National Bank of

Ukraine (NBU) regulated foreign exchange (FX) markets

during the Russo‐Ukrainian War in 2022. Data collected

from both the black and authorized FX markets suggested

that the content of the NBU's announcements significantly

impacted FX market agents. Announcements aimed at

maintaining a fixed (floating) FX rate prompted an increase

(decrease) in the black market premium in cash transac-

tions. Moreover, the NBU's announcements influenced the

sale side of foreign currency more than any other aspect,

an area where the black market FX traders held near

monopolistic power.

JEL CLASSIFICATION

D83, E44, E58, F31

1|INTRODUCTION

Central bank comm unications are on e of the most importan t policy tools by wh ich a central bank su pports its

objectives and manages public expectations (Woodford, 2001). An established and simple method used to

evaluate the effectiveness of central bank communicationsistoexaminethereactionoftheeconomyand

J Financ Res. 2023;46:183–203. wileyonlinelibrary.com/journal/JFIR

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This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and

reproduction in any medium, provided the original work is properly cited.

© 2023 The Authors. Journal of Financial Research published by Wiley Periodicals LLC on behalf of The Southern Finance

Association and the Southwestern Finance Association.

Standard disclaimer applies. We thank Yuriy Gorodnichenko, Gretchen Meyerhoefer, and the participants of the JFR's 2023 European Symposium and 5th

Warsaw Money‐Macro‐Finance Conference for providing comments and feedback.

financial markets to developments within central banks. For instance, Rosa (2011) has investigated the effect of

the Federal Reser ve's decisions and statements mad ei n relation to U.S. stock market indic es and found that the

latter can have a greater impact. Moreover, Gorodnichenko et al. (2023) and Hayo and Zahner (2023)have

demonstrated that sentiment conveyed in central bank announcements, and even the voice of the speaker, can

influence financial markets. However, most previous studies conducted on central bank communications have

focused on Western Economies that typically operate in low‐volatility environments. By extension, we take a

step further by examining the reactions to central bank announcements duringa full‐scale war, one of the most

severe shocks that any country can face.

During times of significant exogenous shocks to the economy, assessing the impact and effectiveness of central

bank communications becomes increasingly challenging. Hayo and Neuenkirch (2015) and Vayid (2013) have

investigated the role of central bank communications during a subprime crisis. Cieslak and Schrimpf (2019) and

Égert and Kočenda (2014) find that the nonmonetary policy announcements related to economic growth and

financial risks significantly drive the stock market during periods of financial crisis. Beyond that, Unsal and Garbers

(2021) have studied the effects of the COVID‐19 pandemic on world economies and found that it forced central

banks to resort to using extraordinary, unconventional measures such as quantitative easing, foreign exchange (FX)

intervention, and even direct lending to major corporations. However, while all of these studies have examined

significant economic shocks, none of those shocks have had as severe an impact on the economy and financial

markets as a military conflict that has led to massive economic destruction. This study aims to fill that gap by

examining the effectiveness of central bank communications under extreme stress, specifically in the case of

Ukraine during the Russo‐Ukrainian War. While researchers typically examine stock market reactions to central

bank communications, we choose not to do so due to the underdeveloped stock market in Ukraine. Instead, this

paper investigates the responses of the black market for foreign currency in Ukraine to announcements released by

the National Bank of Ukraine (NBU) in 2022.

The Ukrainian black FX market provides an ideal laboratory for exploring our primary research question.

The interplay of the dollarization of the economy, a fixed exchange rate, and initially negative expectations

about the prospect of the Russo‐Ukrainian War decreased the demand for UAH relative to USD. The

consequence was a downward pressure on its exchange rate, which fuelled the black market for USD. As a

result, for many individuals, exchanging USD for UAH using the NBU's official rate lost its appeal. The mirror

transaction, that is, purchasing foreign currency for Ukrainian hryvnia from an authorized agent, became next

to impossible when commercial institutions were no longer willing to part with their foreign reserves at below

market‐clearing prices. In response, as individuals sought more favorable exchange rates for their USD

holdings, a black market for foreign currencies emerged. Thus, anyone wanting to convert their cash holdings

of USD into UAH would receive a more favorable exchange rate than the official rate. In addition to this, the

black market offered a rare possibility to purchase foreign currency for UAH, albeit at a significant markup.

ThosemarkupsconstitutetheblackmarketFXpremium, whichweuseasthemainresponsevariableinour

analysis.

A black market premium (BMP) is not a phenomenon unique to Ukraine (Fardmanesh and Douglas, 2008). In

the literature, it refers to the percentage difference in exchange rates between the official exchange rate set by the

authorities and the rate at which foreign currency can be obtained through the black market (Bahmani‐

Oskooee, 2002). The existence of a BMP often signifies restrictions on the availability of FX, as individuals may be

willing to pay a premium to obtain access to foreign currencies via unofficial channels (Fishelson, 1988). Several

factors have been identified as contributing to the emergence of BMPs, including a currency control policy and FX

restrictions. For example, Fardmanesh and Douglas (2008) have shown that FX controls and expansionary monetary

policy exert a positive effect on BMPs. Similarly, Cerra (2016) found that a capital control policy can create a

shortage in the supply of foreign currency and drive up its price on the black market. In addition to this, Acharyya

(2001) has examined the link between exchange rate policies and BMPs through the income effect and export

quality channels and has shown that they work in opposite directions.

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