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Resolving price and exchange rate puzzles with the structural VAR model: Evidence from Uzbekistan

Author

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  • Elyor Davlatov
  • Umidjon Duskobilov
  • Judit Sági

Abstract

This study seeks to analyse monetary policy transmission (MPT) using a structural vector autoregression model (SVAR) in a transitional economy. First, a baseline recursive model based on the Cholesky decomposition was formulated to examine extensive time series, revealing abnormal reactions of prices and exchange rate (FX) to monetary policy (MP) shock. Second, we employed an alternative model to address anomalies, integrating both short- and long-run restrictions to refine the identification strategy. Both price and exchange rate puzzle were resolved with the alternative model and FX, consumer price index (CPI) had statistically significant reactions to the MP shock in the medium and long term. Third, it also indicated that the contractionary MP shock contributed to FX appreciation with a substantial magnitude while the FX shock produced a statistically significant CPI response, suggesting a strong FX pass-through. Robustness tests confirmed stability of the alternative model with different specifications. A clear communication strategy strengthens the credibility of the Central Bank of Uzbekistan (CBU) which reduces the strong FX pass-through and facilitates a smoother transition to the inflation targeting regime.

Suggested Citation

  • Elyor Davlatov & Umidjon Duskobilov & Judit Sági, 2026. "Resolving price and exchange rate puzzles with the structural VAR model: Evidence from Uzbekistan," Post-Communist Economies, Taylor & Francis Journals, vol. 38(2), pages 152-172, February.
    • Handle: RePEc:taf:pocoec:v:38:y:2026:i:2:p:152-172
    DOI: 10.1080/14631377.2025.2593848
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