Магістерські тези 2000

Andreyeva Tetyana: “Privatization, Ownership Structure and Company Performance: Case of Ukraine”

 

This paper assesses the role of privatization in the transition process and analyses the impact of ownership structure on company governance and performance. This research also addresses the impact of institutional factors on company performance. With respect to ownership, the study provides evidence for Ukraine that company performance improves with ownership concentration. An important finding of this research is to demonstrate that concentrated insider-owned firms show the best performance in Ukraine.

 

Asinski Dzmitry: “The Relationship between Financial Development and Economic Growth in Transition Economies”

 

Economic growth is one of the ultimate goals of any economic system. This paper examines the question whether in transition economies the level of financial development influences economic growth. The empirical investigation was carried out using both simple cross-country correlation analysis and dynamic pooled least squares. Generally, the results are somewhat indefinite. Cross-country correlation analysis shows strong positive link between financial development and economic growth. However, the panel estimation results are rather ambiguous. In addition, several simple Granger causality tests were run in order to estimate the direction of causality between financial development and economic growth. Since the main focus of the paper is on transition economies, the indicator reflecting one of the major drawbacks of financial systems of some transition economies – interenterprise arrears – was introduced and then tested using the data on Ukraine and Russia.

 

Besedina Olena: “Nature of Barter: Case of Ukraine”

 

Ukrainian economy now has been experiencing a large-scale demonetization manifesting in the increasing portion of transactions held in non-monetary form. This paper investigates nature of barter in some transition economies in case of Ukraine. This paper stresses the time dimension: it is presumed that barter causes are changing through time. It is hypothesized that at the present stage barter is used as means to hide information to create information asymmetry under conditions of weak market institutions. To verify the hypothesis empirical data are examined. The dataset includes data on barter and financial indicators of the enterprises by regions and manufacturing industries. The results appear to support the hypothesis of barter being currently a strategic variable rather than depending on financial position of economic agents.

 

Bigdai Vitaly: “Fiscal Decentralization and Tax Sharing in Transition Economies”

 

It is usually admitted that fiscal decentralization may have different outcomes, both positive and negative. The exact set of outcomes depends on the arrangement of intergovernmental relations. One of the central elements of intergovernmental finance in transition economies is the system of tax sharing. This paper investigates how the system of tax sharing affects the outcomes from the process of fiscal decentralization in transition economies. It tries to show that tax sharing may lead to biased tax collection. A number of policy recommendations on how to rectify the situation are proposed and weighted in the context of Ukraine.

 

Bilotkach Volodymyr: “IMF Loans and Moral Hazard”

 

The paper approaches the issue of moral hazard, associated with loans, given out by the International Monetary Fund to the transition countries. The general hypothesis examined is that, given the current framework of relationships between the IMF and governments of the transition countries, the IMF loans do not contribute to incentives to reform and lead to losses for the economies as a whole.

The case is modeled as the dynamic game between the IMF on one side and a government of a transition country on the other. The analysis of the model shows that the equilibrium depends upon the commitment of the government to the whole-scale market reform (defined through the institutional framework of a well-functioning market economy). The moral hazard occurs in case of the uncommitted government and results in time lost which could have otherwise been used for implementation of sufficient market reform, as well as in imposition of the debt burden on the country, to be paid back by taxpayers.

 

Bizyaev Oleg: “Buybacks of the Ukrainian Foreign Debt”

 

This paper considers the possibility of buybacks of the Ukrainian external debt in Eurobonds to increase the creditworthiness of Ukraine on international credit markets. Buybacks is a purchasing of the external debt by a debtor country at market prices. The overall situation with the external debt is highlighted and, using different theoretical approaches of market based reduction mechanisms, the profitability of buybacks for Ukraine is proved. As a conclusion some policy implications which could help Ukraine to re-access international credit markets are given.

 

Bondarenko Serhiy: “Currency Substitution in a Dollarized Economy: The Case of Ukraine”

 

In highly dollarized economies, the distinction between currency substitution and asset substitution becomes crucial for policy decisions. In this study, the hypothesis of currency substitution in the two dollar aggregates – foreign currency denominated deposits and dollar cash in circulation – is tested based on the estimation of inflation equation for the case of Ukraine. An unconventional proxy measure of dollar cash in circulation in Ukraine is considered for the first time. With due notice of data and model limitations, the results of this research provide some evidence in support of currency substitution hypothesis for the dollar cash in circulation aggregate. Although the hypothesis of currency substitution in foreign currency deposits also appears to be supported by empirical evidence, currency substitution effect in this aggregate may be much smaller than that in dollar cash in circulation. Importance of these findings for policy decisions is discussed in the paper.

 

Borovikova Volha: “The Determinants of Bank Failures: The Case of Belarus”

 

This paper tests empirically the proposition that the probability and timing of bank failure depends on bank-specific factors, general macroeconomic conditions, and political factor. We applied a split-population survival-time model to Belarusian banks that failed during 1992-1999 to show how the interaction of all these factors affects the bank’s fragility. This investigation allows us to answer the question how banks should adjust their activity to minimize the risk of failure and how banking regulation should respond to the added risk – if any – of bank failure and what changes in banking structure and regulatory procedure are necessary in order to prevent bank failures. The paper also studies whether there is a significant difference between major contributing factors in bank failures for developing market and developed western economies.

 

Chyruk Olena: “Choice under Uncertainty: Risk Attitudes and Gender in Ukraine”

 

The importance of studying choice under uncertainty cannot be overestimated. Each individual, that is, an economic agent, makes decisions about the allocation of his scarce resources, which should be used efficiently. This paper examines risk preferences of Ukrainian students when they face uncertain outcomes. A risky environment is generated by a set of lotteries. The process of elicitation is designed on the basis of the two-stage approach introduced by Becker et al. (1964) and the Random-Lottery Incentive system, the so-called “certainty–equivalent technique”. The results of our experiment show that students are on average inclined to be more risk seeking when the probability of winning is small, and near risk neutral when the winning probability is high. Also we find that students are less risk seeking preferences of the higher prizes than of the lower ones. The pattern of risk attitudes resembles those found by Kachelmeier and Shehata (1992) in China and Belianin (1998) in Russia. Thus, there is no cross country difference in the risk attitudes. Furthermore, we found that, ceteris paribus, female students exhibit more risk seeking than do male students. Disposable income of students as well as the income of their total household also appears to influence their risk attitudes.

 

Dedov Maxym: “The Efficient Market Hypothesis and The Ukrainian Stock Market”

 

The paper overviews the historical development and peculiarities of the concept of efficient markets, investigates the behavior of the Ukrainian overthe-counter stock market returns by testing the weak form of efficient market hypothesis, examines time variance property of return volatility and its influence on the market returns themselves, identifies some implications of the empirical findings. Application of the heteroskedasticity consistent variance ratio tests to weekly stock returns results in rejection of the joint hypothesis of weak-form efficiency and the random walk model of price behavior. GARCH(p,q) models estimated for the same data confirm the assumption of volatility clustering of returns, and suggest no significant effect of conditional volatility on returns.

 

Eremenko Igor: “An Alternative View on Central Bank Targeting in Transition Economies: The Role of the Financial Sector”

 

The author argues that effect of monetary policy on real economy is too uncertain and lagged to use economic growth as direct target of monetary policy, while accepting price stability as a sole target will be costly. He suggests adopting financial system development as an intermediate target, since this sector is very important for economic growth, it is easy to control and monitor it. Special attention is paid to one particular feature of the financial sector: the role in transmission of monetary policy from the Central Bank to the real economy. Institutional settings, which determine the shape of the financial system and effectiveness of monetary policy are found. The author constructs index of predicted effectiveness of the monetary policy for 11 countries in Eastern Europe and traces positive correlation of this index with economic development that supports his hypothesis. This model will be especially important for transition economies, where the financial system is poorly developed and the authorities tend to implement financial repression.

 

Fedzhora Liliya: “The Distribution of Subsidies in Ukraine. Effect of Presidential Elections”

 

In my work I examine the influence of the Ukrainian Presidential elections on the distribution of subsidies for regions. The null hypothesis is that net transfers in the regions are not affected by the results of the election. Using a political economic regression model, I apply the Banzhaf voting power index of the regions, using the fact that the power index measures the reward that each must obtain for his marginal contribution. Most results do not support the null hypothesis and reveal the political bias of distribution of subsidies by regions.

 

Fonkich Kateryna: “Rent Seeking and Interest Groups under Institutions of Transition: The Case of Ukraine”

 

This thesis relates rent seeking by powerful interest groups to poor performance of some transition economies, and shows this relationship on the example of Ukraine. I used the existing theory to build and solve a mathematical model, which shows how the power of interest groups and institutions determine the equilibrium amount of rent seeking of each group and, in turn, the income in the economy. Some empirical evidence presented, supports the hypothesis that there are strong interest groups in Ukraine, involved in rent seeking, and these activities are widespread and pervasive enough, to hamper the efficiency of the economy. It also shows, how rent seeking could be the related to other transitional diseases: non-monetary payments, permanently loss-making enterprises, tax evasion and capital flight. As the result, I come up with a circular flow for the rent-seeking economy, which shows how rent-seeking activities extract value out of productive activities. This redistribution leads to a shift of incentives from the productive activities towards rent seeking, and reduces growth. High level of rent seeking becomes self-sustaining, as far as it is the major source of income for powerful interest groups.

 

Gnatkovska Viktoria: “Trade Flows in Transition Economies: Economic or Institutional Determinants?”

 

Trade responsiveness to market signals may be considered as an indicator of success in economic reforms. This paper attempts to provide evidence for persistence of institutional factors in Ukrainian trade. Estimated price elasticities of export and import of three selected Central European economies with Ukraine and European Union (EU) give support for negative effect of institutional arrangements in Ukraine expressed in lower price elasticities in trade with it relative to the other region. The negative causal relationship running from export flows to real exchange rate is found in trade of sampled countries with EU. This supports the findings of “modern theory” of trade determination. For Ukraine negative association of export and relative prices arises due to significant policy induced impediments for trade that tend to have larger impact on it than the market forces, thus reversing the relationship. For the same sample of countries for the period of 1995-1999 import demand tend to work in accordance with predictions of conventional demand theory. Therefore, although sampled Central European countries managed to achieve success in moving to market (as reflected by higher elasticities), there is an evidence of its partiality due to the reversed causality. For Ukraine this problem is even more appealing.

 

Holod Dmytro: “The Relationship between Price Level, Money Supply and Exchange Rate in Ukraine”

 

Monetary economists and policymakers in transition economies such as Ukraine are increasingly interested in how price level responds to changes in policy instruments or intermediate targets. In this paper, the relationships between CPI, money supply and exchange rate are estimated using Identified Vector Autoregression Approach. The results show that exchange rate shocks significantly influence price level behavior. Therefore, I conclude that exchange rate can serve as an efficient intermediate target for the monetary policy. There is some evidence that positive money supply shocks lead to a rise in the price level. However, this influence is not very strong, which can be explained by the fluctuations in the demand for hryvnia. Thus, there is a need for estimation of the money demand function in Ukraine. I also find strong evidence that money supply responds to the positive shocks in the price level by monetary contraction, which can be a sign of the conduct of the inflation targeting policy by the National Bank of Ukraine.

 

Isayenko Oleksiy: “Anti–Dumping as Strategic Behavior”

 

This paper develops the game-theoretic representation of international trade. The game is formalized as intranational prisoner’s dilemma with two countries and four players in each country: government, import-competing industries, exporters, and consumers. On the example of WTO, it is shown that international trade agreements facilitate the solution of the intranational prisoner’s dilemma for free trade outcome. However with present GATT/WTO rules anti-dumping, which is argued to have a protectionist nature, becomes governments’ dominant strategy. The anti-dumping Nash Equilibrium turns out to be second-best solution of the intranational prisoner’s dilemma. The validity of the model is supported by empirical tests. On the basis of the model the conclusion is made that WTO is capable to diminish the spread of anti-dumping by substituting the anti-dumping legislation with antitrust principles.

 

Kitsul Yuriy: “Contagion of Financial Crises in the Context of Ukraine”

 

This paper will discuss financial crises contagion in Ukraine and Russia. Contagion is defined as the increase of probability of speculative attack in Ukraine, which is caused by the existence of speculative attack in Russia, rather than by domestic economic fundamentals and as an increase of degree of comovements across financial markets of the countries in a crisis period relative to tranquil period. After review of relevant literature, the author constructs exchange market speculative pressure indexes and tests the null hypothesis of no contagion using regression, correlation, Granger causality and VAR analyses tools. No evidence supporting the existence of contagion of the 1998 financial crisis from Russia to Ukraine is found.

 

Korenok Oleg: “Non–Monetary Transactions in Ukraine. The Principal–Agent Approach”

 

In this paper we use a case study investigation of non-monetary activities in transition economies. Our results suggest that current empirical researches use inappropriate methodology and thus provide us with questionable results. The evidence does not support macroeconomic instability, low availability of cash, poor legal protection of creditors and tax evasion as main driving forces of barter in investigated transactions. Our alternative explanation of non-monetary transactions in Ukraine is that barter is a device for hiding large-scale profitdiverting activities by management of state or weakly corporate governed enterprises. Both empirical case-study investigations and theoretical analysis of the transactions in Principal-Agent framework provides support for this hypothesis.

 

Kupets Olga: “The Impact of Active Labor Market Policies on the Outflows from Unemployment to Regular Jobs in Ukraine”

 

The Ukrainian labor market is characterized by increasing open unemployment, spreading long-term unemployment and by the stagnancy of the unemployment pool. The system of active labor market policies directed towards the registered unemployed job-seekers in Ukraine consists of public employment services, training/retraining, public works, job quota for vulnerable groups, early retirement, and interest-free loans to start-up business. Although theoretically labor market policies can crowd out regular employment because of distortive effects, we advocate usage of these policies as a means of combating unemployment and easing social tensions in Ukraine. Using a large panel of quarterly data from regional employment centers (including outflows from registered unemployment, number of registered unemployed, number of available vacancies, active labor market policies expenditures and inflows), we estimate the effects of active labor market policies on the job-matching process with Cobb-Douglas specification in Ukraine. Estimates of an augmented matching function have confirmed our hypothesis that active labor market policies such as training and public works (measured as total regional spending and as inflows of participants) have a significant positive impact on outflows from unemployment to regular jobs in Ukraine. We address potential endogeneity problem in the case of ALMP inflows, employing the set of instruments. Regression results of an augmented matching function with separate parameters for training and public works expenditures show that training has greater effect on number of new matches than public works. Therefore, implemented ALMP schemes seem to improve the efficiency of the Ukrainian labor market. In that case we would recommend to dedicate more resources to these programs and to expand a range of unemployed placed on them, paying particular attention to vulnerable groups.

 

Kuribko Nataliya: “Reforms of Social Security System: Intergenerational Effects. Case of Ukraine”

 

Different reform options would have distinct effects on various generations. Usually older generations would prefer debt-financed transition to FF system, while younger generations would favor tax-financed transition. It appears that although tax-financed transition lowers tax burden for the younger generations and increases it for the older generations, bond-financed transition would decrease tax burden more than tax-financed transition for each generation in Ukraine. This can be explained by population structure and the long duration of the debt-servicing period. On the one hand, there will be an increase in labor for two decade after 2001. Therefore, the young generations of 2001 would prefer to postpone the repayment of the debt, because in several years there will more workers to repay this amount of debt. On the other hand, the debt is repaid in 50 years beginning from 2001 or even from 2011, while people work on average 45 years. Therefore, it is advantageous for generations to place the largest possible burden to the end of repayment period, so the tax burden is placed not on them, but on future generations. Such a possibility is given by bond financed transition.

 

Legeida Nina: “Measurement of the Fiscal Deficit in a Transition Economy, Case of Ukraine, 1995–1999”

 

The paper considers different methodological aspects of the measurement of fiscal deficits in a transition economy. The issue of fiscal transparency also is addressed. While measuring and monitoring fiscal deficits, three factors are important to consider: the type of the budget deficit, the coverage of the public sector and the time over which the budget deficit is measured. A number of various budget deficit measures and adjustments to the official budget deficit are applied to the estimation of the fiscal deficit in case of Ukraine. The augmented fiscal deficit turns out to be at a high level, though there is a tendency towards decline. Further, possible negative effects of the government’s intention to lower the official budget deficit are discussed. The paper ends with some policy implications and recommendations.

 

Maryanchyk Ivan: “Performance and Concentration in a Transition Economy (The Case of Brewing Industry)”

 

The paper considers the problem of performance-concentration interrelationship in a transition economy. The research concerns the brewing industry and covers all necessary topics accounting for changes in both performance and concentration, and hence the market structure. The timeseries model was built based on 37 observations, starting from the 1st quarter 1991 till the 1st quarter 2000. Empirical results indicate that bigger concentration may benefit only the firms that build this concentration, whereas the fringe firms could be harmed and even driven out of the market. The direction of causality is bilateral: concentration causes performance and vice versa.

 

Melyota Iryna: “Integrated Economic and Environmental National Accounts. The Case of Ukraine”

 

In this paper the System of National Accounts, methodology for calculation GDP, is investigated. Limitations of the existing measure, GDP, are examined, and new approaches of integrating economic and environmental accounts, improving the existing measure are considered. The practical experience of ecologically adjusted GDP in case of Ukraine shows the magnitude of overvaluation of conventional GDP. Analysis of obtained results gives the view of industrial production that reflects changes in its resource base. The benefits of economic and environmental accounting for policy-makers are discussed.

 

Nizalova Olena: “The Economic and Social Consequences of Maternity Protection: A Cross–Country Analysis”

 

This study is devoted to the investigation of the social and economic consequences of maternity protection all over the world. Its proponents often state that maternity protection helps to improve the health of children and eliminate gender discrimination in the labor market. Moreover, maternity leave entitlements are designed so that they reduce to some extent the cost of children for women, influencing in such a way fertility rates. Maternity leave laws have similar design in more than 100 countries. The findings of this study suggest that the relationship between maternity leave duration and variables under consideration (fertility rate, infant mortality rate, and femalemale labor market differentials) is significantly different across country groupings. This raises doubts as to the practicability of imposing similar policies without embodying regional and cultural differences in their structure.

 

Oleksiv Marta: “The Determinants of FDI: Can Tax Holiday Compensate for Weak Fundamentals? Case of Ukraine”

 

Throughout the world countries are interested in attracting foreign direct investments into their economies. The investment climate that includes fundamentals and institutions, have a great impact on the FDI flow into the country. One of the approaches that suggest the relationship between FDI and investment climate is neoclassical theory. Using this approach I try to explain uneven distribution among the transition countries, which characterized by the larger flow of FDI into middle-income countries than into low-countries. During the 1992-1996 Ukraine used tax holiday as the main “remedy” for unfavorable investment climate. In this work, using empirical analysis, I show that this policy was ineffective due to its incredibility and inability to influence the productivity factors. The thesis proposes policy implications of its main findings.

 

Piontkivska Iryna: “Is Economic Growth a Cause or Cure for the Environmental Degradation: Testing Environmental Kuznets Curve Hypothesis”

 

This paper investigates relationship between economic growth and environmental quality using the analytical framework based on the “environmental Kuznets curve” hypothesis. According to the EKC hypothesis environmental degradation has an inverse U-pattern with respect to economic growth. The EKC could be explained in terms of structural and technological changes, and more effective environmental regulation. The hypothesis is tested for local air pollutant such as sulphur dioxide using panel data for the sample of European countries including transition countries. The conclusion is twofold. First, the results imply that the effect of economic growth on the environment is subject to environmental Kuznets curve. Second, more effective environmental policies and institutions in transition countries have potential to lower an environmental price of future economic growth.

 

Poharska Olga: “Do the More Regulated Transition Economies Exhibit More Corruption?”

 

Recent interest in the issues of corruption and its consequences for development outcomes has been accompanied by a growing theoretical and empirical literature. However, for effective and successful polices to combat corruption the roots of it should be investigated. This paper examines the link between the corruption levels and the degree of administrative intervention in the economy. In a cross-section of transition economies, the positive relationship between regulatory burden and corruption levels is tested. Results demonstrate a strong empirical link between these issues. Even after controlling for other governance indicators (like institutional quality, political instability and unpredictability), countries with higher degree of state intervention exhibit more corruption. The paper also investigates other possible causes of corruption such as low wages of government officials relative to private ones on corruption, polisical instability, low institutional quality etc. Based on obtained results the importance of deregulation of the economy is stressed but magnitude of complex reforms is accented. The findings of these studies and their consequent policy recommendations can help a country understand the shortcomings in its policies and institutions and design a better strategy to strengthen the state’s performance.

 

Prokopovych Pavlo: “Stationary Equilibria in a Bargaining Model”

 

We apply a cost -saving approach to studying a number of mutual defense games. This approach is founded on computing cost savings from interior borders of the members of an alliance. We show that location vis-à-vis potential allies and border attributes matters for alliance formation and burden sharing if an alliance were to form. A “NATO-Ukraine-Slovakia” mutual defense game is studied both in the short- and in the long run. The course of action countries should follow to achieve a mutually acceptable utility distribution is under study. We prove the existence of a stationary strategy equilibrium in an n -person bargaining game when players’ utility functions are concave.

 

Razanau Aliaksei: “Entry Decision of Foreign Banks in Post–Communist Countries: The Case of Ukraine and Belarus”

 

The entry of foreign banks into Eastern European markets has expanded since the fall of Communist regimes. However, the distribution of foreign banks’ offices between the Former Soviet Union countries is conspicuously uneven both in terms of scale of presence and parent bank selection. This paper will examine the theoretical framework of bank expansion and illustrate its empirical application to the cases of Ukraine and Belarus. The study will reveal bankprospective motives underlying the decision of a foreign bank to enter postcommunist markets, as well as the country-specific determinants of the extent of foreign bank presence on a given national territory. The synergy of such a twofold analysis will provide immediate practical applications for both the management of Western banks and policymaking in transition economies.

 

Repei Vitalii: “Ownership Structure, Corporate Governance, and Corporate Performance: Evidence from Ukraine”

 

This paper attempts to find the most efficient system of corporate governance in economic environment with poor institutions. Ukrainian corporate sector is analyzed as a case. The data from 318 companies from different industry sectors and regions are used to test the effects of different types of ownership structure on enterprise restructuring and economic efficiency. I found that private organization outsiders with high concentration of ownership rights govern enterprises most efficiently. There is evidence to improve institutional structure for successful economic development.

 

Scherbakov Aleksander: “Generalized Approach to Currency Crisis Risk Analysis”

 

Three types of currency crisis models coexist in the literature: first generation models view speculative attacks as being caused by economic fundamentals which are inconsistent with a given parity. Second generation models claim selffulfilling speculation are the main source of a currency crisis. Third generation models consider international illiquidity as necessary and sufficient condition for balance of payments crisis and/or banking sector collapse. This paper presents an empirical model that incorporates all three generations of currency crisis models using a pooled probit specification analysis. Data include thirteen countries that are asssumed to have similar market conditions. Time series data represents period from 1970 till 1997. The method used in the paper provides empirical justification for a set of macroeconomic indicators that represents different theoretical models. Obtained results may be quite useful for further more sophisticated approaches of currency crisis risk analysis. The applicability of the model is tested on a transition economy of Ukraine.

 

Taran Svitlana: “Property Rights, Institutions and Private Sector Performance in Transition Countries”

 

This study focuses on one of the factors that influences the private sector development and enterprises’ decision to make domestic investment in the transition countries, reliability of the institutional framework, as it is perceived by potential investors – private entrepreneurs. We hypothesize that higher institutional credibility guaranteeing more secure property rights of the private entrepreneurs is associated with higher levels of private sector development in the transition countries. We test this hypothesis by conducting cross-country analysis using different institutional indexes to capture the impact of different sources of institutional uncertainty on entrepreneurs’ decisions. Empirical findings show that total credibility of institutions and in particular lack of corruption and political stability are important explanatory factors of differences in private sector development and restructuring and investment enterprise activities. The results suggest that building reliable institutions promotes business development, enterprise restructuring and domestic investment, and thus economic growth in transition countries.

 

Tsvihun Oleksandr: “Economic Growth and Institutions: Mortgage Lending in Ukraine”

 

The significance of establishing of mortgage system in Ukraine has been considered in the work. The main purpose of the work is to show what would be a potential impact of the mortgage system on the economic growth in Ukraine. The author has built a theoretical concept, which links the mortgage with the real interest rate in the economy, the amount of investment, the financial development and economic growth. Using econometric analysis, the author test the relationship between the real interest rate and economic growth in transition economies, which allows support author’s hypothesis that collateralization (mortgage) will positively impacts of economic growth. Also, using results of regression, author makes an attempt to evaluate a potential impact of mortgage system introduction on economic growth in Ukraine.

 

Verchenko Olesia: “Potential for Portfolio Diversification across Eastern European Stock Markets”

 

This study provides an empirical analysis of portfolio diversification potential of transitional Eastern European and former Soviet Union equity markets. The claim is that although these economies tend to move at the same direction, the return series from these markets are not fully integrated. The existence of far from positive unitary correlations and the absence of cointegration between returns in most markets, indicate that these markets are independent to the extent that there exist profitable opportunities from diversification across them. But as an analysis of the actual patterns of portfolios flows into these countries demonstrates, international investors tend to fail to exploit all benefits. The paper gives some explanations for this phenomenon on the basis of institutional factors, as well as using theories of bias and agglomeration. Some implications for economic policies for «offended» countries are derived, with the goal to improve the effectiveness of their signaling about investment attractiveness.

 

Volkov Andriy: “Currency Substitution and the Demand for Money in Ukraine”

 

Currency substitution is a common issue in transition countries. Its existence partially reflects the economic processes, which operate in economies of those countries, produced by insufficient market reforms at early stages. It goes without saying that the high degree of trust to domestic money is crucial for formulating and conducting effective monetary policy. The problem is that transition countries and Ukraine as well suffer from distrust of domestic currency, which is perceived mainly as a mean of payments but not as a store of value. The later function is done by the “hard” foreign currency and that determines currency substitution as a phenomenon in transition countries. This paper addresses the issue of currency substitution in the context of the demand for real balance in Ukraine that was studied for two periods: 1994:4-1996:6 and 1996:6-1998:12, which have different characteristics in terms of macroeconomic conditions determined by government policy. The key point of the work is the effect of stabilization program on the determinant of currency substitution in the demand for domestic money. In order to detect this, a partial adjustment model of the demand for real balance was implemented, which incorporated the parameters of currency substitution such as expected exchange rate approximated by lagged value of current rate and foreign currency interest rate represented by LIBOR. These parameters are treated in the literature as determinants of direct and indirect currency substitution respectively. The model was estimated by OLS with additional employment of Cochane-Orcutt procedure to adjust for serial correlation. The results show that in the first period exchange rate is the main determinant of currency substitution while in the second one it is the foreign currency interest rate. It is found that these determinants produce different effects on the demand for real balances. Namely the first exert negative impact while the second has a positive. This basically explains high velocity of circulation during the first period and its slowdown in the second. Estimated model for the demand for foreign currency in the second period displays high sensitivity to the domestic and foreign interest rates that prove the ability of the central bank to control purchases of foreign currency through the provision of high interest rate. The results also show insensitivity to the real income of the economy that supports the fact that the demand for foreign currency is speculative.

 

Volosovych Vadym: “Determinants of the Choice of an Exchange Rate Regime for a Transition Economy”

 

This paper addresses the question of exchange rate regime selection in a transition country from the political economy prospective. The influence of both political and economic conditions of 13 Central and Eastern European and former Soviet Union countries on the choice of exchange rate regimes is tested empirically by a probit model. Results of the regression determine to what extent country’s political and economic structure, including its political instability, openness, historical rate of inflation, and variability of export earnings, help explain the selection of exchange rate regime. Higher political cost of devaluing after pursuing fixed-rate regimes does offset the effect of short-term considerations. Structural and economic variables have a significant influence on the regime choice. The estimated model turns out to be statistically successful, generally in line with the predictions of the theory and actual data for Ukraine.

 

Vyshnyak Olga: “Twin Deficit Hypothesis: The Case of Ukraine”

 

Theoretical considerations of the twin deficit hypothesis are applied to investigate budget deficit and current account deficit phenomenon in Ukraine. Recent twin deficit experience of Ukraine is described. The twin deficit hypothesis is tested empirically by employing cointegration and Granger-causality tests. Investigation showed that budget deficit and current account deficit are cointegrated and a government budget deficit Granger-causes a current account deficit. The transmission mechanism between the two deficits works mainly through the exchange rate. Existence of twin deficit relationship presupposes certain policy recommendations necessary to ameliorate the situation. In particular, development of a strong financial sector of the economy and improvement of the investment climate are essential for this country’s development and may serve to break the linkage between the two deficits.