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

Elyor Davlatov, Umidjon Duskobilov and Judit Sági

Post-Communist Economies, 2026, vol. 38, issue 2, 152-172

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.

Date: 2026
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DOI: 10.1080/14631377.2025.2593848

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