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The exchange rate as nominal anchor: A test for Ukraine

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  • Conway, Patrick

Abstract

Transition economies, and especially those of the former Soviet Union, have used fixed exchange-rate policy as a nominal anchor for interest rates and inflation during recent decades. In this paper I demonstrate that the rigorous application of this policy in Ukraine over the period 1999–2005 did not in fact eliminate significant deviations of Ukrainian interbank interest rates from those on the London interbank market. Estimation using weekly data over the period 1999–2005 illustrates that the government’s “nominal anchor” policy vis à vis the US dollar was effective at eliminating the risk of currency depreciation. However, other risks related to convertibility and liquidity were either not addressed or exacerbated, and thus deviations from uncovered interest parity continued through the period. This has a clear policy implication: monetary and financial-sector policy should be coordinated to eliminate convertibility and liquidity risk as well as the risk of currency depreciation.

Suggested Citation

  • Conway, Patrick, 2012. "The exchange rate as nominal anchor: A test for Ukraine," Journal of Comparative Economics, Elsevier, vol. 40(3), pages 438-456.
    • Handle: RePEc:eee:jcecon:v:40:y:2012:i:3:p:438-456
    DOI: 10.1016/j.jce.2012.02.005
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    Cited by:

    1. Shinji Takagi & Vitalie Ciubotaru, 2013. "Putting the Pieces Together: The Moldovan Exchange Rate Policy Puzzle," Research in Economics and Business: Central and Eastern Europe, Tallinn School of Economics and Business Administration, Tallinn University of Technology, vol. 5(1).
    2. Amir Khordehfrosh Dilmaghani & Amir Mansour Tehranchian, 2015. "The Impact of Monetary Policies on the Exchange Rate: A GMM Approach," Iranian Economic Review (IER), Faculty of Economics,University of Tehran.Tehran,Iran, vol. 19(2), pages 177-191, Spring.

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    More about this item

    Keywords

    Uncovered interest parity; Nominal anchor; Exchange-rate-based stabilization; Asset pricing;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration

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