The National Bank of Ukraine Communication Strategy Optimization within the Framework of Impact on Exchange Rate Expectations of Economic Agents
Round 1
Reviewer 1 Report
The paper is well written and easy to read. But, I cannot fully follow the story. The paper begins by talking about behavioral finance and the importance of central bank Communication. The paper then moves on to focus, without any links to the front end of the paper, to discuss various variables the Ukrainian central bank should focus on when setting the interest rate. There is no clear connection between the first and the second subject. Is the purpose to find the right variables for the bank to use to communicate? Or is the purpose to argue what target the central bank should have? These are two different subjects.
Minor points:
i) I'm missing references to the literature on transparency and inflation targeting in paper.
ii) I'm not convinced by the scatterplots and the correlations. I would like to see some proper analysis using e.g. a VAR model.
Author Response
Thank you for the referee report. In our response we would like to inform you that on the basis of your referee report the article was refined. Among other improvements we clarified the main aim and its other components that are stipulated by the complexity of the exchange rate expectations and economic agents’ behavior formation in the section “Introduction”.
We stress the fact that the behavioral and fundamental exchange rate factors should be considered in close relationship, because everything that the NBU is not able to explain by the influence of fundamental indicators is formed by behavioral (often irrational) factors.
In this article we want to clear up the nature and suggest ways to improve the communication strategy of the national monetary regulator in the context of influence on the monetary and exchange rate expectations and behavior of economic agents. Equally important is the task, on solving which the article is aimed, that is the need of methodical approaches to forecasting the fundamental value of the national currency (UAH) in terms of internal and external factors that are causing it.
According to the above-mentioned, in the updated version of the article we suggest the model of forecasting the UAH exchange rate with regard to the impact of external, internal and combined (including behavioural) factors. We are of the opinion that this model can serve as a methodological basis for the development of the NBU communication with economic agents about the fundamental value of hryvnia.
Other items:
a) Inflation targeting is not the subject of this article. Its subject matter is specified in the above comments, as well as in the supplements to the article made by us in the process of its improvement. The title of the article is specified. The new title focuses on exchange rate expectations.
b) Existence of relations between exchange rates of the national currency and numerous factors of its formation is determined in the article. A large number of functions that describe these relations are the main cause of the presence of many models forecasting the exchange rate. The choice of the method of the exchange rate forecasting depends on the following preconditions: ER regime (fixed, floating and combined), the time horizon of forecasting and the forecasting object (absolute values of the nominal or real ER or relative change of the exchange rate values).
VAR modeling will be used by us in our further research, including additional examinationof all dependencies determined in this article.
Reviewer 2 Report
To confirm my understanding , the only result of the paper is include the exchange rate in determining inflation. Seems like a very obvious result. Just seems like a simple result using basic regression. Nothing outstanding or unique.
Author Response
On the basis of your referee report the article was refined. Its main aim and derivative tasks were specified. Peculiarities of the formation of the exchange rate dynamics in Ukraine were outlined; the model, use of which will enable the NBU to communicate with economic agents about fundamentally justified exchange rate level in Ukraine better and more efficiently, was suggested.
Reviewer 3 Report
The paper builds on a very interesting topic, especially given my support to the literature investigating the impact of central banks' communication and more profoundly the effects of news advent on markets. This interesting topic constituted one of the strong points of the manuscript in my opinion, though after the first reading both the title and the abstract seem to be a bit over promising. The abstract is constructed in a hectic way and does little in the direction of achieving the purpose of this section. Moreover, the language used could benefit from a series of relevant upgrades. In general, sections belonging to academic contributions have their intended purpose and I advise the author/authors to keep this in mind while restructuring the manuscript. One clear example is the methodology section. It is unclear, and again contributes in an insufficient way to the general logic of the manuscript. Here I would have expected a clear formulation of the approach that highlights method over argument and offers a rigorous path for potential replication.
The same can be observed in the results and discussion sections. It shows more discussions than results, and a large portion of it can be considered general knowledge. At some point some regressions pop out, again doing little in achieving value added.They should have been introduced above.
The first two figures could be omitted in my opinion. I would trade them for a clearer formulation of the problem at hand.
At stated above, this is a great topic that shows a lot of perspective given a proper analytical construction. I consider the manuscript to have a work-in-progress status and advise the author to restructure it and expand their investigation in order to achieve a publishable status.
Author Response
Thank you for the referee report. In our response we would like to inform you that on the basis of your referee report the article was substantially restructured and expanded. Among others, we took into account your remarks on the necessity of bringing up the content of each section of the article to its functional purpose.
In the section “Introduction” we clarified the main aim and other components of the aim of the article.
Section concerning Methodological Framework was rewritten from a new angle.
In our work on refining (expanding) the article we focused on the development of methodical approaches to forecasting the fundamental value of UAH in terms of internal and external factors that are causing it. According to the above-mentioned, in the updated version of the article we suggest the model of forecasting the UAH exchange rate with regard to the impact of external, internal and combined (including behavioural) factors. We are of the opinion that this model can serve as a methodological basis for the development of the NBU communication with economic agents about the fundamental value of hryvnia.
In our view Fig. 1 is essential because it outlines specific to Ukraine factors of the exchange rate formation unlike the 105 factors analyzed and grouped by us for the US dollar index. We agree with your suggestionon Fig. 2 and decided to refuse from it in favour of a more detailed formulation of the task, fleshing out the research methodology and specification of our proposals on the development of methodical approaches to forecasting the fundamental value of the hryvnia.
Round 2
Reviewer 1 Report
It is clear that you have taken my comments to heart and revised the paper. I therefore suggest that the paper is accepted.
Reviewer 3 Report
I acknowledge the efforts put in upgrading the manuscript. I would have expected a little more in several areas, but all in all the manuscript is in a more decent shape than in stage one.
