Does the contagion effect of the
Balance of Payment (BoP) crisis
exist?
Ukrainian case
Khomiak Vasyl
vasylkhomiak@gmail.com,
Taras Shevchenko National
university of Kyiv
Shaping Europe 2020:
Socio-Economic Research
Bucharest,
November, 2013
Definition
The BoP crisis is a sharp decrease of
the national currency in result of
speculative pressure or capital
outflow and/or decrease of the
National reserves of the Central bank.
(Kaminsky, Reinhart 1996)
Research Contribution
• The BoP crisis is formalized for
Ukraine by the EMP index;
• Hypothesis of contagion effect impact
on Ukraine are tested.
Brief Theory: Models
1-st generation: change in macroeconomic
fundamentals is the main reason of crisis
(Krugman 1979);
2-nd generation: the BoP crisis is selffulfilling and pessimistic expectation.
Behavior can be a trigger (Obstfield 1994);
3-rd generation: contagion effect as crisis
trigger, “twin-crisis” – banking and the BoP
crisis (Krugman 1999, Eichengreen 2005,
Wyplosh);
Literature Review-1
• Eichengreen, Rose, Wyplozh (1997),
Contagion currency crisis
• Krugman Paul, (1979), “A Model of
Balance-of-Payment Crisis” (Basement of
EWS);
• Maurice Obstfeld, (1994),“The Logic of
Currency Crisis” (Models of 2-nd
generation);
• Kaminsky, Lizondo, Reinhart, (1998),
“Leading Indicators of Currency Crisis”;
• Lestano, Kuper (2005) “Currency crises in
Asia: a multivariate logit approach”
Literature Review-2
• Reinhart, Rogoff, (2009), “The Aftermath
of Financial Crisis – Set of Indicators”Asian case;
• Cuaresma, Jesýs, Slacik, (2008),
“Determinants of Currency Crises: A
Conflict of Generations?”; (Binary variable,
Bayesian model)
• IMF WP (2004): Autocorrelation-Corrected
Standard errors in panel Probits: An
Application to Currency Crisis Prediction;
• ECB (2006): Are emerging currency crisis
predictable?
Literature Review-3
• Lestano, Kakub, Kuper (2003)
“Indicators of financial crisis do work. An
early-warning system for six Asian
countries”-PCA;
• The IMF-FSB early warning exercises,
design and toolkit, 2010;
• Furceri, Guiochard, Rusticelli, OECD
(2011) “Episodes of large capital inflows
and the likelihood of banking and currency
crisis and sudden stops”
Approaches to model Exchange
market pressure index
EMPi Components
Authors
Changes
in Cuaresma, Slacik (2008)
international reserves, Fratzsher (2002), Herrera
exchange and interest (1999), Eichengreen, Rose,
rate
Wyplosh (1997).
Changes
in Arias (2004), Chui (2002),
international
reserves Edison (2000), Kaminskyy,
and exchange rate
Reinhart (1999).
Exchange market pressure
index, Ukraine
1 rmi ,t
1  i ,t
1 ii ,t


EMPi ,t 
 rm rmi ,t
 e  i ,t
 i ii ,t
where rmi,t – reserves of the National bank of Ukraine
in international currency;
 rm– standard deviation of reserves of the National bank of Ukraine;
ei,t – real effective exchange rate;
–e standard deviation of REER.
Ii,t - interest rate of the interbank market
 i- standard deviation of the interest rate of the interbank market
EMP Index, Ukraine
General Model
EMP _ UA   0  1 * EMP _ RUS   2 * EMP _ PLN  3 * us _ int erest _ rate 
  4 * CRU _ steel _ index 5 *WTI   6 * CPI   7 * CA 
 8 * GDP  9 * PFTS  10 * int erest _ rate  11 * cred  
where emp_rus, emp_pln - exchange market pressure index calculated
for Russia and Poland that shows impact of crisis from neighboring countries.
3 month LIBOR interest rate is taken to include interest rate of USA
as the one of the main market player on the global level.
CRU index represents trend on the metal market that is important to Ukraine
as export-oriented country where metal export has the highest share.
WTI price is an indicator of the commodity market energy sources.
High energy consuming of Ukraine industry means that volatility of energy
prices impacts on Ukraine import.
Current account deficit measured as percent from GDP is an indicator
of the strength of external position.
CPI, interest rate and GDP represent fundamentals and internal economic state
PFTS index shows how attractive our market for foreign investors.
Estimation output-1
Model 2
Pvalue
Model 3
Pvalue
EMP_Russia(-2)
EMP_Poland
EMP_UA(-1)
D(USA_3M_I(-1))
CRU(-3)
WTI_US
CPI(-2)
CA_TO_GDP(-1)
D(LN(GDP(-1)))
D(LN(PFTS(-1)))
Interest rate(-3)
Model 1
Pvalue
-0.18 0.09
0.10 0.10
0.20 0.13
-0.93 0.02
-0.01 0.01
0.04 0.00
-0.37 0.01
24.91 0.01
2.38 0.01
0.70 0.50
0.06 0.01
0.47 0.00
0.13
-1.07
-0.01
0.04
-0.30
25.95
2.33
-0.37
0.07
Schwarz criterion
3.02
3.28
3.06
Durbin-Watson statistic
2.07
1.75
1.86
9.14
2.48
1.93
0.02
0.25
0.04
0.06
0.24
0.33
0.01
0.00
0.00
0.02
0.00
0.02
0.70
0.00
6
4
2
0
-2
-4
-6
-8
EMP
Model 1
Model 2
Years
Model 3
2012M7
2012M2
2011M9
2011M4
2010M1
2010M6
2010M1
2009M8
2009M3
2008M1
2008M5
2007M1
2007M7
2007M2
2006M9
2006M4
2005M1
2005M6
2005M1
2004M8
2004M3
2003M1
2003M5
2002M1
2002M7
2002M2
2001M9
2001M4
2000M1
2000M6
2000M1
Prediction power of estimated
models
Exchange market pressure index, Ukraine
Estimation output, impact of
partner countries
All period
Sample
EU(-2)
PLN
RUS
EMPUA(1)
D(USA_3
M_I(-2))
Schwar
z criterion
DurbinWatson
stat
2000:52012:7
0.05
0.14
0.15
Befotre crisis
During and after
crisis
P2000:5- P2008:1value 2008:8
value 2012:7
0.42
-0.09
0.29
0.29
0.01
0.09
0.23
0.19
0.02
0.04
0.65
0.26
Pvalue
0.00
0.01
0.04
0.38 0.00
0.24
0.02
0.50 0.00
0.42 0.26
-0.04
0.93
1.32 0.00
3.20
3.15
3.10
2.04
2.10
1.66
Impulse function
Impact of 1 S.D of Polish EMP on Ukraine EMP
0.6
0.5
0.4
0.3
0.2
0.1
0
-0.1
1
2
3
4
5
6
7
8
-0.2
-0.3
All period
Before crisis
Crisis and after crisis period
9
10
Conclusion-1
• Deep integration of Eastern European
countries by trade links and foreign capital
entry to banking and real sectors makes
such emerging countries as Ukraine,
Poland, Romania etc more disposed to be
"infected" by the contagion effect of the
Balance of Payment crisis.
• Evolution of the BoP crisis shows that
fundamentals don't play leading role in its
prediction anymore, but investor’s behavior
and inflow of capital closely connected with
world conjuncture have high prediction
power.
Conclusions-2
• Any shock of partner countries, especially
who is member of the European Union
with high probability would have impact on
Ukraine during crisis period.
• If the crisis is not caused by price decline
on commodity markets, highly likely that
crisis in neighbor country caused by
fundamentals
or
internal
behavior
expectations would not be imported to
Ukraine.