Can a pure real business cycle model explain the real exchange rate: the case of Ukraine

Kateryna Onishchenko ()

EERC Working Paper Series from EERC Research Network, Russia and CIS

Abstract: Real exchange rate (RER) of Ukrainian currency can be explained within the real business cycle framework without any forms of nominal rigidities. Fitting Ukrainian quarterly data for the period 1996 Q1-2009 Q3 into the small open economy real business cycle model and testing it by method of indirect inference shows that RER can be reproduced by RBC framework. I run the basic model with Ukrainian data and derive for this model the behavior of the productivity and preference shocks that perform as an I(1) process. Therefore, the extracted shocks are the shocks occurring historically in the Ukrainian economy since they are jointly implied by the model and the data. The generated pseudo-samples for RER by method of bootstrapping allow to obtain the distribution of the best fit ARIMA(2,1,4) parameters and to test with the Wald statistics if the ARIMA parameters estimated with the historical data lie within confidence intervals of those estimated for bootstrapped pseudo Q parameters. All of the ARIMA parameters for the real exchange rate lie within 95% confidence intervals and the parameters jointly lie within 95% confidence interval as it indicated be the Wald statistics. Therefore, real exchange rate of Ukrainian hryvnia during the period 1996-2009 can be explained within real business cycle framework. VAR and VECM methodologies are also applied in order to capture the evolution and the interdependencies between multiple time series of the RBC model. Applying unrestricted VAR to HP filtered I(0) data series I find that real exchange rate behaves in the predefined by RBC framework manner. Productivity on impact leads to real appreciation followed by gradual depreciation. VECM mechanism is applied to the non-stationary I(1) data series that is provided in levels and does not contradict the previous results. These obtained results are quite encouraging and has important policy implications. First of all, it advocates in favour of more flexible exchange rate policy regime in Ukraine and avoidance of the non-sterilized interventions on the currency market. Besides, it provides the further guidance for the direction of effective monetary policy to fight inflation that should be more oriented at the inflation targeting using the interest rate policy instrument.

JEL-codes: E31 E32 E37 F31 F37 (search for similar items in EconPapers)
Date: 2011-11-06
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Related works:
Journal Article: Can a pure real business cycle model explain the real exchange rate: the case of Ukraine (2012)
Working Paper: Can a pure real business cycle model explain the real exchange rate: the case of Ukraine (2011)
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