The Real and Nominal Effects of Large Devaluations in Ukraine

Abstract

Using monthly data for the 2000–14 period, this paper discusses the macroeconomic effects of large devaluations in Ukraine. Employing a time-varying parameter framework, the author shows that a nominal devaluation in “normal” times is associated with an increase in exports and a decrease in imports, an acceleration in consumption price inflation, and a contraction in industrial output (since 2014). However, a currency collapse is likely to be inflationary and contractionary in respect of exports, imports, industrial output, and retail trade turnover. The author shows that export dynamics is stimulated by higher world commodity prices and industrial growth abroad. Since the 2008–09 financial crisis, industrial output has become more strongly linked to the performance of the largest foreign trade partners.