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Devaluation shocks and their consequences for Ukraine's economy

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  • O. Bereslavska

Abstract

The article investigates the impact of devaluation shocks on Ukraine's economy. The author argues that the mechanism of exchange rate effect is mixed, with positive and negative effects of exchange rate fluctuations affecting the competitiveness of the internal and external sectors in different directions. The author considers three waves of devaluation of the hryvnia (1998-1999, 2008-2009, and 2014-2015) and analyzed their effects. It is shown that hryvnia devaluation in 1998-1999 had the largest effect, which was initially manifested in the growth of exports in 2000, being its peak observed in 2001-2004. The share of imports in the trade balance did not significantly decrease, because Ukraine had a high degree of energy dependence and needed a lot of components for domestic production. However the high prices on international commodity markets contributed to the formation of the raw-material character of Ukraine's exports. The second wave of devaluation (2008-2009) caused by the global financial crisis did not have a large positive impact on Ukraine's trade balance, as the international markets saw a decline in global demand for goods and services. The depreciation of the hryvnia had a negative impact on domestic output, because the total negative effect of currency devaluation considerably affected the sectors, which were oriented to the domestic market and had a significant share of imported raw materials and energy in their cost structure. The third wave of hryvnia devaluation (2014-2015) to some extent contributed to the reduction of the negative trade balance, but the full effect of the hryvnia depreciation is difficult to assess because the balance indicators were calculated less the lost territories. The raw material orientation of Ukrainian exports contributed to a hypertrophy of the domestic economy and the emergence of "Dutch disease", which showed itself in the sector of semi-finished goods. As a result, there took place a substitution of more complex items with more simple ones having lower added value. Along with the impact of devaluation shocks on Ukraine's trade balance, the author examines the relationship between devaluation of the hryvnia, inflation and living standards. It is shown that, between inflation and devaluation, there is a close relationship, which is explained by the technological structure of Ukraine's import dependent economy. It is concluded that high inflation and devaluation of the hryvnia make no contribution to the stability of money circulation in Ukraine and lead to lower living standards. The author recommends diversifying this country's export structure towards a significant increase in the share of high tech products and services.

Suggested Citation

  • O. Bereslavska, 2015. "Devaluation shocks and their consequences for Ukraine's economy," Economy and Forecasting, Valeriy Heyets, issue 4, pages 29-42.
  • Handle: RePEc:eip:journl:y:2015:i:4:p:29-42
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    File URL: http://eip.org.ua/docs/EP_15_4_29_uk.pdf
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    1. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
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