DETERMINANTS OF THE CURRENT ACCOUNT BALANCE AND OUTPUT IN UKRAINE

Abstract

Using quarterly data for the 2000—2017 period, fiscal and monetary policy effects upon the real exchange rate (RER), the current account balance and output (GDP) in Ukraine are estimated with the SVAR model. It is found that the budget surplus is a factor behind both an improvement in the current account and the business cycle, arguing in favor of fiscal discipline as a stabilization tool. On the other side, there is weak evidence that the monetary hangover measured as a deviation of the monetary aggregate M2 from its equilibrium trend contributes to an improvement in the current account as well, but at the cost of significant output losses with 4 to 6 quarter lags. Similar outcomes are brought about by the RER depreciation above trend, with a simultaneous drop in output on impact combined with the current account surplus. Both money supply and RER effects could be explained by crowding out of investments in the nontradable sector by the export activities, as it is implied by the familiar dependent economy model. As there is an increase in the money supply in response to economic boom, it rejects criticisms about artificial money shortages in Ukraine. Our results provide support to the so-called «45o rule» of a direct link between output and the current account, although with a significant time lag. А favourable current account effect upon output is achieved in the long run either, with an opposite restrictionary effect being observed on impact. While there is no causality running from the money supply to the budget balance, a strong link between the budget deficit and expansionary monetary stance is observed.Everything seems to be that an increase in GDP is an effective factor in improving the current account balance over the long term, while a favorable feedback also appears with a significant time lag (in the short term, it is quite the opposite, that is, improving the current account balance worsens the cyclical GDP position). However, the decomposition of the remnants does not allow asserting the importance of causality «catÞyt» та «ytÞcat». It is obvious that changes in the balance of the current account depend largely on the state of external markets, and the cyclical GDP dynamics ─ on internal factors, which relate primarily to the exchange rate and the monetary "sway" (the effect of the budget balance is less significant).