MA Theses 2002

Amialchuk Aliaksandr: “Which is a Socially Better Design of Excise Taxation in Ukraine?”

As far as the Ukrainian taxation system is under transformation currently, the design of tax reform should be based on the principles of economic efficiency and fair distribution of tax burden across the society. Recent work by Keane and Prasad (2001) has shown that Ukraine possesses the highest level of income inequality and, hence, consumption inequality among most of post-soviet countries in the period of transition. I employ the notion of marginal conditional welfare dominance for ordering different commodities according to the rate of inequality in their consumption. I attempt to identify the marginal changes in commodity taxation that are likely to be overwhelmingly approved by society, drawing upon some minor restrictions on the social-welfare function. Welfare is approached from the viewpoint of achieving equality in consumption for the whole society. The proposed method of marginal conditional welfare dominance allows policymakers to ask what is a better tax system, and avoid strong value judgments. Therefore, a given commodity is a better base for excise taxation, relative to the other commodity, if all social welfare functions would approve relatively higher taxes on that base. Additionally, this change in taxation should not increase the deadweight loss in economy. By applying this concept to Ukraine I make an equity and efficiency argument for greater reliance on alcohol taxation, and suggest that efficiency and political considerations would also justify this choice. My sample includes data on household commodity consumption expenditures, taken from the Sampling Household Expenditure Survey for the year 2000, conducted by the Ukrainian State Statistics Committee. This thesis draws on the optimal tax literature and shows how, with available data, that literature can be used in practical application to Ukrainian public finance.

Bakun Oleksiy: “Relative Price Variability, Inflation and Inflation Uncertainty: Evidence from Ukraine”

Relative price variability, inflation and inflation uncertainty are found to be closely related in many economies. The former term refers to relative price change, while the latter is to the extent to which future aggregate inflation is unknown. Although there is considered theoretical and empirical evidence of this relationships ship, there exist some disagreement among economists on causality, measurement and cost issues. Moreover, inflation uncertainty has its costs, including redistribution of income, depressed investment and, hence, growth, and ultimate reduction in social welfare. Although the inflation rate in Ukraine has fallen substantially over the last few years, high swings in relative prices still remain, which may cause inflation. We also state that inflation uncertainty may have not been reduced as dramatically as inflation rate. With GARCH model we construct an inflation uncertainty measure, defined as the conditional variance from the model describing inflation. The skewness of price distribution serves as a measure of price variability. It is found that high inflation increases inflation uncertainty. Also, the higher is the price variability, the higher is the level of inflation. Then we suggest that policymakers should care not only on the rate of inflation itself, but also on the asymmetric distortions in CPI distribution across goods and services. Also, because inflation uncertainty reduces while inflation rate lowers, it is preferable to keep low-inflation regime.

Betliy Oleksandra: “Measurement of the Real Effective Exchange Rate and the Observed Jcurve: Case of Ukraine”

The real effective exchange rate is an important economic indicator. It is not directly observable and must be constructed as an index. The construction of such indices requires a number of decisions – which price indices and weighting schemes to use, what currencies to include. These decisions alter the results. The thesis examines the concepts of the real effective exchange rate and a number of methodological issues relating to the construction of the index. It develops several measures of the real effective exchange rate for Ukraine based on different weighting systems and relative price indices, such as CPI and PPI. In addition, the thesis compares selected measures of the real effective exchange rate in terms of their ability to explain movements in Ukrainian trade balance. The statistical results indicate that changes in the REER index can serve as a determinant of trade balance fluctuations in Ukraine. In addition, simulations suggest the J-curve pattern of trade balance response to the real depreciation as the theory predicts.

Bilan Olena: “Investigating Liquidity Effect in the Ukrainian Interbank Market”

This thesis studies the relationship between money and interest rate in Ukraine. First, theoretical explanation of a short-run negative response of interest rate to monetary expansion – the “liquidity effect” – is provided. Then, attention is paid to the development of empirical studies in the realm of money-interest rate relationship and to the failure of previous research to find strong empirical support to the simple theoretical notion of liquidity effect. Two formal econometric tests for the information content of alternative interest rates in Ukraine reveal that the interbank interest rate is the best candidate for monetary policy studies. A semi-structural vector autoregression model (VAR) is constructed to monitor the dynamic response of the interbank interest rate to shocks in monetary policy variable. Thorough analysis of the operation procedure of the National Bank of Ukraine allows the author to suggest possible solution to the money endogeneity problem in Ukrainian presents strong evidence of the liquidity effect in Ukraine. The results are robust to the lag structure used in the VAR model as well as to the variations in the structural parameter that determines the fraction of the demand shock in total reserves offset by the National Bank.

Boyko Nataliya: “The Monetary Model of Exchange Rate Determination: The Case of Ukraine”

The issue of exchange rate determination has been recently in the core of academic debates. Controversial empirical evidence of conventional monetary theories of exchange rate determination for developed countries puzzled many economists and caused further theoretic development. At that, little evidence exists for transition countries. In this research, the basic and modified monetary models of exchange rate determination with flexible and sticky prices were tested for Ukraine for the period 1996:9-2001:9. As empirical tests show, the error-correction model (ECM) for the basic monetary model does not fit well to Ukrainian data, while the ECM for the modified monetary model better explains behavior of the exchange rate in Ukraine. The results also support flexible price version of the model and indicate the significant role of dollarization for exchange rate stability.

Burlaka Olexiy: “Income Redistribution Through Intergovernmental Transfers in Ukraine”

Distributional questions are central to any polity, but in a representative democracy potential beneficiaries can vote for politicians who support redistribution. If redistribution becomes excessive, however, economic growth can be stifled. In this thesis, the redistribution of income in Ukraine is examined. The focus is on the distribution of the central government’s revenues among different oblast governments, which were highly responsible for the large part of the total public expenditures in Ukraine. The institutional features of Ukraine, such as peculiarities of the intergovernmental relations and characteristics of the tax system, are taken into consideration. An empirical study, based on the latest panel data (1998-2000), tests implication of the median voter hypothesis: redistribution in favor of median income oblasts. The evidence is found to be inconsistent with that implication. The analysis suggests that the redistribution of revenues among the regions in Ukraine is directed from the middle – income regions to the poor and the rich regions. Redistribution in favor of the rich oblasts is explained by interest group activities. Redistribution in favor of the poor is explained by that groups’ relatively high vote participation in elections.

Dudnyk Iryna: “Determinants of Investment Decisions of Ukrainian Enterprises”

A low overall investment rate is one of the most serious economic hardships Ukraine experiences after a decade of transition. In this thesis we discuss reasons for the investment rate being low in Ukraine and analyze factors that raise or lower the probability of undertaking fixed investment on the enterprise level. In our analysis, we employ the Probit technique to assess influence of a firm’s perception of regulatory environment, taxation system and access to external finance on its investment decisions while controlling for firm – specific characteristics as size, profitability, origin and age. Our findings are that investment by firms is primarily determined by such intrinsic characteristics as being a de novo created enterprise and size. Positive profits in the same year appeared to be highly significant for enterprises to invest. Our results suggest that managers’ perceptions of taxation system and access to external finance are not constraining for the investment on the enterprise level. We found that perception of business regulation as posing higher obstacle for operating business is associated with higher probability of investment. Possible explanations for the received results are proposed.

Dzvinka Roman: “How Does the Unofficial Economy Interact with the Official One? Case of Ukraine”

The purpose of this research is to determine the effect of the shadow economy on the official one and possible reverse relation. The question is highly important in the contemporary Ukrainian conditions as the shadow sector is believed to be substantially large, but its impact still not adequately studied. The unobservable nature of the shadow economy is the strongest challenge. We proceed in two stages. Firstly, the size of the underground sector in Ukraine during 1993-2001 is estimated with the augmented money demand approach. Secondly, VAR and simultaneous equations models are built in order to address our key questions. It was assessed that local hidden economy is indeed substantially large when compared to other countries. Moreover, the ratio of shadow to official GDP did not show any particular trend over last nine years. We did not find a strong effect of the unofficial sector on the official one, while the reverse relation is positive and significant. We believe that major tax relief envisaged by the draft Tax Code would break stable preferences of economic agents towards underground activities and ceteris paribus cause even faster recorded growth.

Grozava Kira: “Recent Regulation on the Disbursement of Electricity Revenue in Ukraine: Public Interest or Regulatory Capture?”

In June 2000, barter operations were prohibited by an enactment of Cabinet of Ministers, and shortly, Amendments to the Law of Ukraine “On Electricity” were introduced. The amendments entitle regulation authorities (government officials) to allocate customers’ payments for electricity among electricity market participants. According to positive economic theory of regulation, either consumer or producer group gains from regulation of a particular industry. Yet another view is that a single-buyer model (mandatory pool) for electricity, such as the one currently operating in Ukraine, “encourages” government to intervene in the allocation of cash proceeds and to divert cash to illegal purposes, thus creating other group(s) of potential beneficiaries of regulation. Analysis of algorithm of payments’ distribution introduced by the regulation policy of interest and negative profits of electricity generating companies indeed suggest that there is group(s) other than producers and consumers. This work offers a refined version of Peltzman model allowing for a tradeoff between three groups and analyses empirical evidence from Ukrainian electricity sector to evaluate how the presence of an additional group(s) distorts price-profit tradeoff discussed in the Peltzman model. Econometric findings suggest that net cash flows of electricity generating companies decreased after July 2000. Thus, regulation did not achieve the intended goal.

Ilyashenko Tatiana: “Estimating Welfare Gains from Tariff Rebalancing in Telecom: a Case for Ukraine”

This research aims to estimate the deadweight losses associated crosssubsidization in Ukraine’s telecommunications market. For this, elasticities for three markets were estimated: national long-distance calls, international calls to CIS countries and international calls to rest of the world. The loss in economic efficiency is reflected by the gap between marginal cost of telecommunications service and the price consumers pay. Under the monopoly environment in Ukraine, prices for telephone connections, monthly subscriptions, and local calls have traditionally have been set below costs. Resulting deficits have been subsidized by above costs long distance and international calling prices. Empirical study, which is based on the latest data (1998-2001), confirms the expectations about the efficiency gains from tariff rebalancing. A combination of price-cap and sliding scale regulatory regimes is proposed as this mechanism retains the advantages of price cap (tariff structure that will enable dominant operator to compete on the market with new operators. It also provides operator with incentives to cost minimization, investment in new cost saving technologies regulation and allow for greater allocative efficiency.

Kachur Roman: “Impact of Special Economic Zones on Regional Investment in Ukraine”

This paper examines the impact of certain incentive schemes called special economic zones (SEZs) and territories of preferential treatment (TPDs) on investment distribution across Ukrainian regions. Theoretically, due to lower taxes, administrative units (oblasts) with SEZs and TPDs should receive increased flow of investment, everything else held constant. Empirical evidence shows that SEZs and TPDs result in significant crowding in effect on investment at the oblast level. Yet, our analysis shows that privileged territories affect investment distribution within oblast, and induce a relocation of investment to privileged areas. However, estimations do not show a significant impact of SEZs and TPDs on the inter-regional distributions of investment across Ukraine. Based on our analysis, we recommend that SEZs and TPDs should not be extended to the developed regions if the goal is to reduce regional disparity across different regions of Ukraine.

Kasyanenko Sergiy: “Measuring the Impact of Infrastructure in Transition Economies”

Infrastructure is believed to be one of the key determinants of economic performance. Existing research, however, has produced equivocal results for the direction of relationship between aggregate infrastructure stock and economic performance (Holtz-Eaking, 1994, Canning and Pedroni, 1999). The effect of social – institutional – infrastructure is less ambiguous (Hall and Jones, 1999). Nevertheless, complete empirical treatment of infrastructure is still rare. This omission is even more apparent for studies of physical components of infrastructure. Our paper attempts to establish a link between physical infrastructure and economic performance of transition economies both at the macro as well as the micro levels. We find divergent results depending on the level of aggregation: while models with aggregate production function do not reveal a significant effect of infrastructure, infrastructure quality is found to have significant positive effect at the firm level. We also find that denser motorway networks are associated with higher degree of competition. Thus, investment in physical infrastructure in transition is productive if it promotes competition and is aimed at upgrading the quality of infrastructure services.

Kereya Ihor: “Effectiveness of the Foreign Exchange Interventions in Ukraine”

The paper tests the effect of the foreign exchange interventions conducted by NBU during 1995-2001 on the level and volatility of the UAH/USD exchange rate applying GARCH technique to the portfolio balance and balance of payments theories. Estimation based on the portfolio balance theory shows effect of interventions on level of exchange rate opposite to the intended by NBU but intended effect on the volatility of exchange rate. Opposite to the intended sign of the effect of intervention on the level of exchange rate is explained by the endogeneity of interventions: central bank is intervening only if exchange rate is moving away from the targeted level. Portfolio balance theory estimation may be not the most appropriate to the analysis of Ukrainian interventions because it assumes high mobility between Ukrainian and international capital markets, what is certainly not the case in Ukraine. Moreover, portfolio balance theory is widely used for the analysis of sterilized interventions, while in Ukraine interventions are largely unsterilized or partially sterilized. Therefore, the paper turns to the estimation of the effectiveness of foreign exchange interventions based on the balance of payments approach. Estimation shows effectiveness of the interventions in decreasing volatility of exchange rate; interventions are also found to affect the level of exchange rate in the desired direction; however, the effect is statistically insignificant.

Khmilevska Nataliya: “Modelling of Household Behaviour in Terms of Shadow Economy: Labour Supply”

The model describes the household behaviour in terms of labour allocation into the official and unofficial economic sectors. A decision on the particular labour efforts in both sectors is designed as a constrained optimisation of a worker’s utility, derived from the composite consumption good and the hours of leisure left. A government is implicitly involved into the modelling by introducing the marginal tax rates in the regular and irregular sectors. The analysis of tax evasion decisions reveals the major determinants of worker’s unlawful behaviour. Finally, the model results suggest that the labour-hours in the unofficial sector are more sensitive to the changes of the gross hourly wage rate and the marginal tax rate in the regular sector than to the enforcement level, designed as a marginal tax rate in the unofficial sector.

Koretska Svitlana: “The Restructuring of Large Ukrainian Enterprises: Impact of Competition, Privatization and Hard Budget Constraints”

This thesis investigates the impact of competition, privatization and hard budget constraints on enterprise restructuring and performance, using the dataset of 177 Ukrainian industrial enterprises with more than 250 employees. The paper also concentrates on the interactive effects between competition, privatization and hard budget constraints in order to reveal the presence of complementarity or substitutability between them. We find positive association between competition and restructuring, and positive effect of privatization, hard budget constraints and foreign competition on performance of the enterprises. Moreover, since the privatization, competition and hard budgets are complements in their effect on restructuring, the positive effect of one policy will be strengthened in the presence of other two. As a policy implication, the study suggests that speeding up privatization process, tightening financial discipline for firms and encouraging competition would foster restructuring process on Ukrainian enterprises and improve their performance.

Kosse Iryna: “Using a CGE Model to Evaluate Import Tariff Reductions in Ukraine”

The problem of trade barriers has been important for Ukraine for a long time, since high levels of protection do not allow Ukraine to join world trade organizations like the WTO. This thesis analyses the impacts of import tariffs reductions on national welfare under the hypothesized condition of Ukraine’s accession to the WTO. A pilot Shoven-Whalley general equilibrium model is developed for Ukraine according to Rutherford and Paltsev (1999). Then, the impact of import tariffs reduction is calculated using a recent (1999) input-output table of Ukraine and GAMS computer software. Based on the simple static model, I find that import tariffs significantly decrease welfare and have the highest marginal excess burden on consumers among other taxes. The CGE model shows that the bigger are import tariffs reductions the lower is marginal excess burden of import tariffs and, therefore, the higher is welfare. The key condition for Ukraine’s accession to the WTO is its import tariffs reductions. The results of this thesis show that membership in the WTO will be beneficial for Ukraine.

Kosse Volodymyr: “Interest Rates and Their Role in the Economy during Transition. The Problem of High Interest Rates. Case of Ukraine”

The paper presents the analysis of the interest rates behavior in Ukraine during the period of transition. Absence of developed government bonds market does not let use usual proxy of interest rate – yield to maturity on this market, used by many economists in the analysis of the developed markets. For these reasons Ukrainian rates are approximated by the credit rate of commercial banks, perhaps the only rate that is set by market forces in Ukraine. The paper explores relationship between interest rate and inflation in Ukraine. Ex-post real interest rates are found to be highly negatively correlated with inflation, indicating for short-run rigidity of nominal interest rates, though long-run Fisher effect is present. The analysis of relationship between changes in real money supply and changes in interest rates shows the presence of strong liquidity effect. The role of interest rate in economy is analyzed using simultaneous equations model based on IS-LM macro model. The results of modeling show that interest rates have statistically significant, but quantitatively small influence on real GDP. Obtained results and further simulation of National Bank of Ukraine policies show that high lending rates cannot be lowered using monetary expansion through increase in monetary base because of matching liquidity and price level effects within one quarter. Greater role of NBU in regulating market failures, such as bank insolvency, by more intensive deposit insurance together with greater role of discount lending and maintaining macroeconomic stability may lead to decrease in overall level of interest rates in Ukraine. This, in turn, may boost investments and economic growth.

Kudlyak Marianna: “Foreign Aid and Growth: Do the Transition Economies Have a Different Story to Tell?”

The thesis investigates the impact of foreign aid on economic growth in transition economies. Although the question of foreign aid is an old one, it has a special significance in current research in the light of fundamental institutional changes in the recipient countries. In particular, the author tests the hypothesis, which prevails in studies on the effectiveness of foreign aid in developing countries, that the positive impact of foreign aid is conditional on good policy environment. The good policy environment is defined as stable macroeconomic policies: controlled inflation, balanced fiscal budget, and efficient structure of foreign trade. Cross-sectional time-series analysis of growth performance of a subset of 25 transition countries is used to determine the possible effect of aid on economic growth. The results of the study indicate that no consistent link exists between aid and growth in a typical transition country. However, if countries are ranked by the quality of their macroeconomic policy environment, aid appears to have a significant positive effect in countries with good policy environment.

Kulyk Andriy: “Inflation and Financial Depth in Transition Economies”

In the paper we discuss the relationship between financial depth and inflation in transition economies. To address this issue we heavily rely on the implications from the theory developed by Boyd, Levine, and Smith (1996) and estimate the model constructed by Khan, Senhadji, and Smith (2001). The relationship of interest is suggested by previous studies to be non-linear, and non-monotonic. We use the data across 16 transition economies over 1994 – 2000 and conform these findings. In particular we found that there is a threshold level of 9-10.5% of annual inflation, after which inflation reduces rather than enhances financial depth. Among other variables we found that the openness to international trade positively affects financial depth, and financial suppression affects financial depth negatively. Trade credit determinants of ukrainian enterprises.

Levchuk Yuliya: “Trade Credit Determinants of Ukrainian Enterprises”

This thesis investigates trade credit (TC) phenomena in Ukraine. In essence, a trade credit is a loan provided by a supplier to its customers in conjunction with product sales, and, thus is an important alternative source of enterprise’s financing. We find that the problem of overdue trade credits was much sharper in Ukraine than in other transition countries in 1998. Preliminary macroanalysis suggests that arrears in TC are strongly associated with “forced” TC practices and underdeveloped financial institutions. Based on micro-level financial data for 609 Ukrainian enterprises we analyze the determinants of TC usage and test our main hypothesis of the existence of a substitution effect between trade credits and bank loans. We find that firm’s arrears and financial needs are strongly associated with higher TC usage, while better access to bank lending – with less trade credits. Private, as well as concentrated state ownership leads to less trade credits. The data supports the proposition that firms with larger amount of bank loans restrict their usage of trade credits. So, the main emphasis for policymakers should be on further improvement of financial system in Ukraine. The paper concludes with possible explanations of the received results and some policy implications.

Lishchenyuk Vitaliy: “Measuring the Influence of Real Exchange Rate on Volumes of Exports in Ukraine”

This paper investigates the relationship between real exchange rates (RER) and volumes of exports from Ukraine to the 25 countries, which are the major Ukraine trading partners, using annual panel data for the period from 1997 to 2000. The study revealed that for the most countries common RER measures, which are based on CPI and PPI, are significant in explaining volumes of Ukrainian exports. Moreover, it was estimated that on average 10% increase in RER leads to 12.7% rise in volume of exports, if RER was calculated using CPI, and to 11.7% rise in volume of exports, if RER was calculated using PPI. And, finally, the RER measure based on CPI has higher explanation power for explaining Ukraine export compared to the one based on PPI.

Lisiankova Katsiaryna: “Long-Run Implications of Population Aging for the Pension System of Ukraine”

Given relatively short horizon of any government, demographic changes, that have long-run consequences, frequently get neglected in economic policies. Population aging has serious long run implications for economic development. This process will have very important effect on the viability of social security systems of many countries of the world. Ukraine also was influenced by demographic transformations. Today the share of Ukrainian population that is eligible for pension benefits is about 30% and it will increase further. This has dangerous consequences for the existing pension system, which is Pay-As-You-Go type system. In this work, I study the impact of the demographic development of Ukraine on the sustainability of its pension fund. For this purpose, I adapt the economic-demographic model developed by Social Security Reform Project of the International Institute for Applied System Analysis (Austria). I perform simulations using 6 different scenarios. I find that according to two out of three demographic scenarios Ukrainian Pension Fund becomes insolvent in 30 years if no changes are made to its arrangement. If pension eligibility age increased to 65 years for both sexes, than system would have positive balance for all demographic scenarios, but only provided that pension contributions will not be reduced. Sensitivity analysis confirms that under the reasonable assumptions about exogenous parameters Ukrainian pension system will not be able to sustain itself in the future due to the problem of population aging.

Litus Yaroslav: “Software Copyright Enforcement Strategies for Ukraine”

Software piracy is the issue of concern in many countries across the globe. Nevertheless, in Ukraine the scale of copyright problems became so large after 10 years of independence that is has resulted in anti-Ukraine trade sanctions. This thesis analyzes the possible strategies to reduce the piracy in such a way that as to lessen the harmful effects on the Ukrainian software consumers but still be effective. Several theoretical approaches are highlighted in the work, two of them in considerable detail. A simple diagrammatic framework for studying the market for software product in the presence of piracy is built, and used to identify the effects of changes in the values of software price, piracy costs, number of consumers and consumers income on the losses from piracy. A cross-country empirical analysis of the joint effect of the level of computerization, Internet access, consumers prosperity and policy factors on the losses from software piracy is performed. This analysis reveals many corresponding dependencies, and shows that Ukraine may expect severe difficulties while improving its software copyright protection regime. Policy advice on the anti-piracy activities for the case of Ukraine is offered, taking into account theoretical and empirical findings.

Lypyavka Nataliya: “Does the Current Ukrainian Income Tax Affect Social Welfare?”

Government policies, such as taxation, subsidization, and the provision of public goods significantly affect the structure of consumption. The comparative evaluation of outcomes of different public policies allows choosing the proper field and degree of government intervention to maximize individual and social welfare. In particular, in this paper I estimate whether the current income tax system helps to improve individual and social welfare in Ukraine. To perform the analysis, I assume the existence of a representative household and constant and homogeneous prices across goods. In the analysis, I use the concept of money metric utility (MMU), which may be derived from knowledge of preferences. I also assume the preferences, given constant prices, are reflected in the total spending for each particular good. As an approximation of utility, I use the level cash expenditures. This choice is supported by two reasons: i) it is ordinality of utility function, ii) MMU is assumed to be increasing in income, that is, more money brings more utility. Fortunately, MMU appears to be concave in income, that is, the appropriately chosen policy aimed to fight inequality in society will reach the target by effectively transferring income from rich to poor.

Martynenko Natalia: “Price Transmission in Ukrainian Food Markets”

Agricultural products are widely traded in the international market. There is a theory that trade liberalization increases the proportion of the volatility in world prices that is transmitted to domestic consumer prices. The rate of price transmission elasticity has implications for market efficiency. The questions are asked about whether there is price transmission in Ukrainian food markets. In this paper, I examine the relationship between world agricultural prices and the Ukrainian domestic consumer prices for sunflower oil, rice, sugar, butter, and cheese. The price elasticities are estimated between 1996 and 2001 using Arellano-Bond dynamic panel data estimator. For four out of five products, Ukrainian and world markets seem to be cointegrated and the price transmission elasticities are rather high. The conclusion is that the commodity arbitrage between the Ukrainian and world markets works.

Medyna Taras: “Pricing to Market Behavior of Ukrainian Exporters”

The mechanism of how exchange rate movements influence prices of exports and imports plays an underlying role in the adjustment of external balances. Studies on the relationship between exchange rate movements and prices of traded goods have been of great interest since the late 1980s, when the US current account deficit did not show an immediate and marked decline, though the value of US dollar had fallen significantly. For Ukraine this topic of research is of interest since results may reveal information about market environment in which Ukrainian export-oriented firms operate and help Ukrainian government make a decision on optimal exchange rate policy. This thesis examines the relationship between exchange rate changes and Ukrainian exports prices. Using panel data and fixed effects model, I found that Ukrainian exporters completely pass-through exchange rate changes to prices in foreign market currency and there is no pricing to market, that is the phenomenon of price discrimination in international markets induced by exchange rate movements is absent.

Melnychenko Eduard: “The Impact of State Corporate Rights Management on the Efficiency of Ukrainian Joint-Stock Companies”

This paper investigates the efficiency of state as a shareholder of Ukrainian JSCs conducting a comparative analysis between private Ukrainian JSCs and the joint-stock companies with state-owned shares, which are governed by different types of state representatives. We try to find out how the second-tier SCR management in Ukraine and, in particular, organizational problems of principal-agent relationship between the state and different types of state representatives influence efficiency of Ukrainian JSCs. The investigation of institutions that determine the framework for SCR management shows that there are serious problems in all managerial schemes and these problems may cause losses of efficiency for Ukrainian JSCs. Empirical research is based on a sample of 466 Ukrainian joint-stock companies for the period of 1999 – 2000. Results of estimation confirm that increase of state corporate control over an enterprise leads to substantial losses of efficiency and that institutional settings of SCR management schemes applied in Ukraine contribute to this inefficiency; there is a significant negative relationship between performance indicators and the index of problems developed to assess degree of problems that face managerial schemes.

Myronovych Artem: “The Impact of Oil Price Fluctuations on the Ukrainian Economy”

It is well known that Ukraine is underendowed in such strategic resources as gas and oil, and taking into account that it specializes in the production of machinery and chemicals, which are highly oil-energy consuming, Ukraine is greatly dependent on the rest of the world. In order to satisfy all internal needs it has to import crude oil from abroad. The goal of this paper is to examine the dependence of Ukraine on the world oil market and to estimate the impact of possible changes in oil prices on main Ukrainian economic indicators, such as output, unemployment, and general price level. Using an approach proposed by Gisser and Goodwin (1983) it can be shown that oil price fluctuations affect Ukrainian GDP and inflation, but have no effect on unemployment at different lags at any statistically significant levels. The results of Error Correction Model indicate that Ukraine will likely face a loss in nominal GDP equals approximately $215 mln during the first quarter as a response to a 20% increase in the price of oil. This result is close to that obtained by IMF (2000), taking into account that they simulated longer period. Indicators monetary and fiscal policies both have the expected signs and positively affect GDP, but they are not a matter for unemployment. A detailed explanation for this result is also presented. As economic theory suggests, monetary policy has greater effect on the main economic indicators than fiscal policy. The thesis then provides possible explanation of the obtained results and their economic meaning. Finally, it gives the description of possible policy implications and the direction for further studies.

Nikulyak Maksym: “Return Behavior in an Emerging Stock Market: the Case of Ukraine”

The paper investigates the nature and possible origins of return autocorrelation found in a Ukrainian stock market index. A simple model of stock market with rational and feedback traders, suggested by Sentana and Wadhwani [1992] is checked for consistency with the actual pattern of behavior of two out of three indices calculated after trading in the Ukrainian Over-the-counter Informational Trading System (PFTS), over a three-year period (from November 1997 till November 2001). The original empirical model by Sentana and Wadhwani had to be modified, which is taken to be an evidence of the Ukrainian stock market being much underdeveloped. EGARCH model introduced by Nelson [1991] was applied to daily PFTS and ProU50 returns. The model allowed us to capture the behavior of two types of investors in the market, which revealed itself in heteroscedasticity of returns and in an asymmetric market reaction to return shocks of different sign. The model proved consistent with the empirical data over the given period.

Norets Andriy: “Household Arrears in Ukraine: Microeconometric Evidence”

Although continual growth of household arrears for housing and utilities causes great concern among policymakers, there has been no empirical study on the micro level of this particular type of arrears in Ukraine and other transition countries. Applying logit, ordered probit, and Heckman’s sample selection models, I conduct a microeconometric investigation of the determinants of household arrears in Ukraine. This empirical study is based on the data from a nationally representative household survey conducted by the State Committee of Statistics of Ukraine in 2000. It is shown that although the effect of the government program for the mutual cancellation of budgetary wage arrears and household arrears shows up in the data arrears to households are still important determinants of the presence and the size of household arrears. Estimation results indicate that while the poor are more likely to be in arrears for housing and utilities, the size of these arrears is positively related to income for those households that have nonzero arrears for housing and utilities. The explanation seems to be that the government program of housing subsidies creates strong incentives for poor people to comply, while the incentives for compliance for richer households are absent. Households headed by people with low level of education and, perhaps, little human capital are more likely to be persistent non-payers. Other things equal, old households seem to have higher payment discipline. Worklessness status of a household as a whole is a major determinant of household arrears. Policy implications concerning the issue are suggested in the paper.

Noskova Ilona: “Frequency Decisions of Airlines on International Routes in Ukraine”

I develop a model of airlines that decide upon changing frequencies after a period of operations in a market. I extend simple Cournot-Nash duopoly framework to include two periods, government regulation, and sunk costs of entry. The model is tested with the data on Ukrainian international markets for air transportation. Entry and exit decisions of airlines depend on exogenous market factors (demand, presence of other carriers) and on firm-specific factors (size, cost structure, country of residence). However, most of the information needed to decide upon a change in frequency is contained in the previous period’s frequency. Ukrainian airlines have lower entry barriers comparing to foreign ones, but also are less productive and often suffer from the lack of capital. Therefore, government protectionist policy is justified for now but should be abandoned when sound markets for capital and leasing services are developed.

Pindyuk Olha: “Determinants of the Commodity Structure of the Ukrainian Foreign Trade”

According to the Heckscher-Ohlin theorem, Ukraine, being in transition, should turn to exporting goods which production is labor intensive due to Ukraine.s relative labor abundance. I conduct a regression analysis of the determinants of the trade commodity structure in order to estimate the importance of factor endowment differences in explaining the commodity structure of Ukrainian trade. This regression analysis incorporates human capital, technological differences, tax privileges and non-tariff barriers to imports. The results show that, in line with the Heckscher-Ohlin theorem predictions, Ukraine tends to export labor- intensive goods; however, its foreign trade structure is significantly influenced by relative endowments of human capital, differences in labor productivity, tax privileges granted to industries, and non-tariff trade barriers.

Politukha Olexander: “Anticipating the Impact of the Planned Increase in Electicity Tariffs on the Ukrainian Economy”

This thesis is devoted to analysing electricity market in Ukraine, segmented according to two types of consumers (industrial consumers and residential users). Electricity is supplied by energy distributing companies (‘oblenergos’) at tariffs regulated by the National Electricity Regulating Committee (NERC). The sector suffers from insufficiency of the tariff revenues to cover all the costs including the industry’s needs to invest in capital replacement. NERC is currently considering increases in electricity tariffs. My thesis attempts to answer the following question: How will the increase in electricity tariffs, currently planned by NERC, affect the players of this market? The conventional cost-benefit analysis of welfare effects of tariffs increase is used as the basic method. The primary focus is on estimating price elasticities of electricity demand based on data from NERC and Ukrainian State Committee of Statistics for the period from 1996 to 2000 on monthly basis. The most appropriate estimation procedures are chosen from several alternative techniques presented in the literature. To my knowledge, there are no estimations of price elasticity of electricity demand in Ukraine in the literature; thus, my thesis is a first attempt in this respect. The thesis question is extremely topical due to electricity being a crucial input in most industries and due to the large share of energy in the Ukrainian economy. Moreover, my research is particularly significant in the wake of the planned tariff increase, and the results of this study are expected to have implications for further tariff policy being considered by NERC.

Poltavets Ivan: “Significance of Credit Rationing in Ukraine”

Smooth functioning of the financial system enhances efficiency of the economy by transferring funds from savers to borrowers. Financial markets differ from those for more conventional goods due to the asymmetry of information, which might result in credit rationing by non-price means. Credit rationing may also occur due to rigidities in interest rates. This thesis presents an overview of economic literature on credit rationing and attempts to localize this phenomenon for the case of transition countries. The overview of the Ukrainian credit market suggests that while the development of the structure of the market is largely over there remain institutional inefficiencies that lead to ‘infrastructure’ credit rationing, preventing satisfaction of demand for credit. Several indirect tests for the significance of credit rationing are undertaken on macro and micro levels for the case of Ukraine. A test suggested by Galbraith (1996) is implemented using Ukrainian data. It is found that monetary policy has a greater capacity to expand output rather than contract it. That is effective supply failure hypothesis and availability doctrine receive indirect support. Therefore, stimulation of credit expansion, through e.g establishment of credit rating agencies, improvement of legislation on collateral, might lead to increase of real output, provided that currently Ukrainian economy may be characterised as liquidity constrained.

Savych Bogdan: “Development of Small and Medium Enterprises in Ukraine under Regulatory Constraints”

The importance of small and medium enterprises (SMEs) in the process of transition from a centrally planed to a market economy is now widely recognized in the literature. This paper investigates the state of small and medium enterprises in Ukraine. The goal of the analysis is to determine the factors that foster and factors that hinder further development of the sector of small and medium enterprises in Ukraine. The hypothesis tested is whether enterprise managers’ decisions to invest into new equipment and/or to use barter transactions differ significantly between SMEs and large enterprises, with respect to the constraints they face. We find that among the basic factors that determine economic performance of firms in Ukraine is ownership structure, level of product market competition, and various administrative and financial constraints. We also hypothesise that increase in administrative intrusions do not foster development of enterprises. These hypotheses are tested on a sample of 3198 enterprises developed by Kyiv International Institute of Sociology that gives statistically valid picture of SMEs in Ukraine in 1999. While financial stringency is obvious at case of SMEs, the regulatory environment was found not to decrease the probability of making investments. Explanations of the obtained results as well as some policy implications for improvement of business environment for SMEs in Ukraine are proposed determinants of external debt-creating financing.

Selitska Natalya: “Determinants of External Debt-Creating Financing: Empirical Investigation with Application to Transition Economies”

In our work we analyze the impact that factors of supply and demand have on the external financing inflows and investigate which of these factors are the most significant in determination of the debt flows magnitudes. Among the factors of supply and demand, we consider not only economic parameters, but also institutional and political factors, such as macroeconomic regulation and political freedom. “Demand-side” factors include values of fiscal deficit, which is a proxy for a savings-investment gap in the economy, and current account deficit. Group of “supply-side” factors includes export potential indices, inflation persistence, and government macroeconomic policies. We conduct panel data analysis for 114 developing countries using annual data for the period 1997 – 2000. We distinguish a group of transition countries from Eastern Europe and Central Asia and compare the results of analysis for this group with the corresponding results for the whole range of developing countries. The analysis proved that the most influencing economic factors in determination of the net external borrowing are: debt burden, trade balance, budget deficit, exports growth, GDP growth, gross domestic savings, and inflation. Among the policy and institutional factors the most significant are: trade policy, capital flow regulation, black market activity and the level of corruption in the government.

Sologoub Dimitry: “Issue of Central Bank Independence. The Evidence from Transition Economies”

It has been argued in the literature that the degree of Central Bank Independence (CBI) can have a strong positive effect on the overall economy’s performance. This paper investigates the validity of this hypothesis by looking at evidence from cross-sectional data on transition economies. Specifically, it poses the following question: Is there a relationship between the degree of CBI and the rate of GDP growth, the size of budget deficit, and the level of Foreign Direct Investment (FDI)? The analysis is carried out within the Levine-Renelt (1992) framework. My study reveals no conclusive evidence in favor of the existence of the relationship between the degree of CBI and considered macroeconomic aggregates. I argue, however, that my results can be contaminated by errors in measuring the degree of CBI: the indices existing in the literature are based on legal provisions, which often are not fulfilled in practice. I therefore propose an alternative measure of CBI, which reflects the actual independence of the Central Bank. The discrepancy between legal and actual CBI can perhaps be the best appreciated by looking at the example of Belarus. I find that actual independence of Belarussian CB in 1995-2000 years was much lower than legal (it falls from 5th to 17th place out of 25 in ranking of CBs in transition economies by their independence), which is mainly explained by the peculiarities of the political and legal environment in this country.

Tsesliuk Siarhei: “Exchange Rate and Prices in an Economy with Currency Substitution: the Case of Belarus”

This paper explores the possibility that such aspect of currency substitution as posting prices for domestically sold goods in foreign currency units can facilitate exchange rate surprises pass-through into the overall price level. Using simple denomination of international trade-like model, it is shown that for a domestic firm it could be reasonable to post prices in foreign exchange, when prices are pre-set one period ahead and exchange rate is uncertain. The presence of firms quoting prices in foreign currency engenders price level responsiveness to unexpected exchange rate changes. This implication is tested on Belarusian monthly data for three aggregate price indices – consumer price index, producer price index, and agrifood price index. Estimation results suggest that the patterns of pass-through into these indices are different. Exchange rate surprises seem to produce significant and prolonged effect on consumer price index, significant immediate effect on producer price index, and insignificant effect on agrifood price index. Under the circumstances of exchange rate targeting and price ii) liberalization in Belarus, these differences may lead to inflation rates divergence across heterogeneous groups of commodities. The estimated pass-through is strongly associated with proxies for currency substitution.

Tsyrennikov Viktor: “Regional Economic Growth in Ukraine”

Using macroeconomic data from 1997 to 2000 I study the pattern of regional economic growth in Ukraine. My research follows Barro’s (1997) approach to the analysis of growth determinants, and takes as a growth measure Harberger’s (1998) real cost reductions, which is superior to total factor productivity, particularly, in a context of transitional economies, and as such Ukraine. The evidence suggests that important factors contributing to economic growth of the Ukrainian regions in 1997-2000 are initial conditions measured as industrial output per capita in pre-decline 1989, human capital measured as a share of students in population, government expenditures per capita, establishment of small and medium scale enterprises, inflation, and inter-sector inequality. Establishment of small and medium enterprises, viewed as a factor that alters the incentives structure, is positively related to region’s performance, and its effect is the largest among the growth determinants. Negative relation between growth and the initial conditions suggests existence of the convergence forces across the Ukrainian regions. The effect of human capital is positive but less important relatively to the other determinants; in addition, causal relation goes rather in the opposite direction, i.e. growth stimulates human capital accumulation. This work summarizing the determinants of regional economic growth in Ukraine in 1997-2000 may further serve as a basis for developing a theoretical model.

Zhylyevskyy Oleksandr: “Human Capital Allocation in the Transitional Economies of Ukraine and Russia”

On the micro level, human capital theory provides many valuable insights into individual behavior regarding education, occupation, mobility, and health. On the macro level, it facilitates understanding of growth patterns across countries. Given the key theoretical and practical role of human capital concept, in this study I apply the basic framework developed by Becker ([1964] 1993a), Mincer (1958 and 1974) and others to Ukraine and Russia. Modifying the methodology of Mulligan and Sala-i- Martin (1995a) and Bils and Klenow (2000a), I construct a feasible index of human capital stock per capita. On the basis of the State Committee of Statistics of Ukraine Household Survey and the Russia Longitudinal Monitoring Survey data sets, I calculate a series of values of the index to determine and compare the allocation of human capital by sector of employment, economic status, and gender in 2000. I find that in both countries education and science sectors have the highest human capital stock per capita and trade sector has the lowest one. Entrepreneurs and self- employed are relatively less skilled than the employees, a pattern similar to that of developing economies. The unemployed are the least skilled and women, in most cases, have slightly higher human capital stock per capita than men.