The Ukrainian case of fiscal devaluation in small open economies

Vdovychenko, Artem and Zubritskiy, Artur (2014): The Ukrainian case of fiscal devaluation in small open economies. Published in: Post-Communist Economies , Vol. 27, No. 1 (4 February 2015)

Abstract

This paper examines the effects of fiscal devaluation on the trade balance of a country with a small open economy. It is assumed that typically such countries are price-takers which means low price elasticity of exports and imports. If this assumption is true, then it’s impossible to make the impact on trade balance through the price mechanism and, accordingly, fiscal devaluation will not have significant effects. To confirm or reject this hypothesis it is necessary to determine causal relationships between changes in fiscal devaluation indicator and trade balance dynamics. Applying a series of causality tests to Ukrainian data the authors argue that dynamics of trade balance causes changes in VAT and social security contributions. Opposite causality wasn’t detected. This fact is treated as evidence of fiscal devaluation inefficiency in Ukrainian-like economies on the one hand and as price-taking characteristics of Ukraine on the other hand. The potential null effect of fiscal devaluation was confirmed with SVAR modeling.

• Item Type: MPRA Paper
• Language: English
• Keywords: Fiscal devaluation, Hsiao causality test, Price-takers, Small open economy, Trade balance.
• Subjects: E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy; F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics

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