Exchange Rate Management in Ukraine: Is There a Case for More Flexibility?
Bas Van Aarle
KU Leuven - LICOS - Centrum voor Transitie-economie; CESifo (Center for Economic Studies and Ifo Institute); Radboud University Nijmegen - Department of Economics
Eelke De Jong
Radboud University Nijmegen - Department of Economics
Economic Systems, Vol. 30, No. 3, 2006
Since 2000 the Ukraine has followed a successful stabilization policy. Stabilizing the value of the hryvnia against the US dollar has been an important ingredient of this policy. However, the resulting unsterilized interventions fuel the domestic money supply and might lead to high levels of inflation later on. Therefore, some questioned the sustainability of the hryvnia peg. In a first step to more exchange rate flexibility, the Ukrainian monetary authorities implemented a one-shot revaluation of 5% against the dollar in April 2005. This paper estimates a small macro-economic model of the Ukrainian economy. Simulations of alternative exchange rate paths are undertaken and the resulting macro-economic adjustments compared to analyze the effects of different exchange rate strategies. These simulations suggest that in the current conditions allowing the exchange rate of the hryvnia to appreciate in an orderly manner might be a good alternative for a rigid peg to the dollar or irregular ad-hoc exchange rate changes.
Keywords: Ukraine, Macro-economic adjustment, Macro-economic models, Exchange rate policy
JEL Classification: E42, E47, E51, E61, F41Accepted Paper Series
Date posted: October 19, 2006
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