Does the contagion effect of the Balance of Payment (BoP) crisis exist? Ukrainian case
Khomiak Vasylvasylkhomiak@gmail.com,Taras Shevchenko National university of Kyiv Shaping Europe 2020:Socio-Economic ResearchBucharest,November, 2013
DefinitionThe BoP crisis is a sharp decrease of the national currency in result of speculative pressure or capital outflow and/or decrease of the National reserves of the Central bank.(Kaminsky, Reinhart 1996)
Research ContributionThe BoP crisis is formalized for Ukraine by the EMP index;Hypothesis of contagion effect impact on Ukraine are tested.
Brief Theory: Models1-st generation: change in macroeconomic fundamentals is the main reason of crisis (Krugman 1979);2-nd generation: the BoP crisis is self-fulfilling and pessimistic expectation. Behavior can be a trigger (Obstfield 1994);3-rd generation: contagion effect as crisis trigger, twin-crisis banking and the BoP crisis (Krugman 1999, Eichengreen 2005, Wyplosh);
Literature Review-1Eichengreen, Rose, Wyplozh (1997), Contagion currency crisisKrugman Paul, (1979), A Model of Balance-of-Payment Crisis (Basement of EWS);Maurice Obstfeld, (1994),The Logic of Currency Crisis (Models of 2-nd generation);Kaminsky, Lizondo, Reinhart, (1998), Leading Indicators of Currency Crisis;Lestano, Kuper (2005) Currency crises in Asia: a multivariate logit approach
Literature Review-2Reinhart, Rogoff, (2009), The Aftermath of Financial Crisis Set of Indicators- Asian case;Cuaresma, Jess, Slacik, (2008), Determinants of Currency Crises: A Conflict of Generations?; (Binary variable, Bayesian model)IMF WP (2004): Autocorrelation-Corrected Standard errors in panel Probits: An Application to Currency Crisis Prediction;ECB (2006): Are emerging currency crisis predictable?
Literature Review-3Lestano, Kakub, Kuper (2003) Indicators of financial crisis do work. An early-warning system for six Asian countries-PCA;The IMF-FSB early warning exercises, design and toolkit, 2010;Furceri, Guiochard, Rusticelli, OECD (2011) Episodes of large capital inflows and the likelihood of banking and currency crisis and sudden stops
Approaches to model Exchange market pressure index
EMPi Components Authors Changes in international reserves, exchange and interest rate Cuaresma, Slacik (2008) Fratzsher (2002), Herrera (1999), Eichengreen, Rose, Wyplosh (1997). Changes in international reserves and exchange rate Arias (2004), Chui (2002), Edison (2000), Kaminskyy, Reinhart (1999).
Exchange market pressure index, Ukrainewhere rmi,t reserves of the National bank of Ukraine in international currency; standard deviation of reserves of the National bank of Ukraine;ei,t real effective exchange rate; standard deviation of REER.Ii,t - interest rate of the interbank market - standard deviation of the interest rate of the interbank market
EMP Index, Ukraine
General Model where emp_rus, emp_pln - exchange market pressure index calculated for Russia and Poland that shows impact of crisis from neighboring countries. 3 month LIBOR interest rate is taken to include interest rate of USA as the one of the main market player on the global level. CRU index represents trend on the metal market that is important to Ukraine as export-oriented country where metal export has the highest share. WTI price is an indicator of the commodity market energy sources. High energy consuming of Ukraine industry means that volatility of energy prices impacts on Ukraine import.Current account deficit measured as percent from GDP is an indicator of the strength of external position. CPI, interest rate and GDP represent fundamentals and internal economic state. PFTS index shows how attractive our market for foreign investors.
Model 1Model 2Model 3P-valueP-valueP-valueEMP_Russia(-2)-0.180.09EMP_Poland0.100.10EMP_UA(-1)0.200.130.470.000.130.33D(USA_3M_I(-1))-0.930.02-1.070.01CRU(-3)-0.010.01-0.010.00WTI_US0.040.000.040.00CPI(-2)-0.370.01-0.300.02CA_TO_GDP(-1)24.910.019.140.2525.950.00D(LN(GDP(-1)))2.380.012.480.042.330.02D(LN(PFTS(-1)))0.700.501.930.06-0.370.70Interest rate(-3)0.060.010.020.240.070.00Schwarz criterion3.023.283.06Durbin-Watson statistic2.071.751.86
Prediction power of estimated models
Estimation output, impact of partner countries
All periodBefotre crisisDuring and after crisisSample2000:5-2012:7P-value2000:5-2008:8P-value2008:1-2012:7P-valueEU(-2)0.050.42-0.090.290.290.00PLN0.140.010.090.230.190.01RUS0.150.020.040.650.260.04EMPUA(-1)0.380.000.240.020.500.00D(USA_3M_I(-2))0.420.26-0.040.931.320.00Schwarz criterion220.127.116.11Durbin-Watson stat2.042.101.66
Conclusion-1Deep integration of Eastern European countries by trade links and foreign capital entry to banking and real sectors makes such emerging countries as Ukraine, Poland, Romania etc more disposed to be "infected" by the contagion effect of the Balance of Payment crisis.Evolution of the BoP crisis shows that fundamentals don't play leading role in its prediction anymore, but investors behavior and inflow of capital closely connected with world conjuncture have high prediction power.
Conclusions-2Any shock of partner countries, especially who is member of the European Union with high probability would have impact on Ukraine during crisis period. If the crisis is not caused by price decline on commodity markets, highly likely that crisis in neighbor country caused by fundamentals or internal behavior expectations would not be imported to Ukraine.