Ukraine Exchange Rate 2013

To what extent is the floating regime benefiting the Ukrainian economy in the context of sovereign crises?

1 Introduction

The Ukrainian political opposition, which seized power in spring of 2014, is challenged to restore financial balance to a country on the brink of default because of inefficient economic policy during the last three years (Giucci, 2014). To prevent the country from defaulting, the International Monetary Fund (IMF) will provide up to $18 billion in loans over two years with one of the conditions being that Ukraine will change the exchange rate regime from a fixed to floating one (Erlanger & Herszenhorn, 2014). However, such a proposal is controversial. On the one hand, the floating exchange rate will contribute to the accelerating growth of Ukraine, which will be 1.4%–2.3% after 2015 (Kondrashev & Puhov, 2014, p.12). On the other hand, the floating exchange rate accompanied by devaluation can lead to nonpayment of foreign currency loans, bankruptcy of firms, and unemployment (Rasmus, 2014).

The main question that arises is to what extent the IMF proposal to alter the exchange regime may benefit the Ukrainian economy. The difficult political and economical situations make studying of this topic relevant. Simultaneously, the controversy about implementation of a floating regime makes the topic interesting to study. The structure of this essay is as follows: introductory remarks, the theoretical framework in combination with the Mundell-Fleming model analysis of current data related to the topic, and a conclusion.

2 Theoretical framework and model analysis

There are several arguments set forth by proponents of the IMF proposal to stimulate Ukraine to join a floating exchange rate system. First, the experts Kirshner, Ricardo, and Giucci (2006) argued that as Ukraine liberalized capital and current accounts over time, it became more vulnerable to a variety of shocks. According to the IMF data, the short-term capital inflows in 2005...