Экономические науки/8. Математические методы в экономике

H. Yu. Yatsenko, Ph.D. in Economics

Institute for Economics and Forecasting, NAS of Ukraine, Kyiv

CHANNELS AND INDICATORS OF CRISIS TRANSMISSION IN THE ECONOMY OF UKRAINE

The characteristic features of the modern world development are the expansion of inter-country relations through export-import transactions, capital flows, labor migration etc. and formation of a corresponding inter-dependence between the countries, which raises the probability of the emergence of both global and local financial and economic crises. Many crises, which emerged as only characteristic for the “country of origin” subsequently spread to the whole global economy. The spill-over of the crises takes place through different channels depending on the country’s geographic position, economic situation, financial dependence and other factors. A research conducted by the Californian University in San Diego and National Bureau of Economic Research in 1990s [4] led to the conclusion that macroeconomic instability and permanent crisis phenomena could cause a recession and long term slow down of the economic dynamics. That means that risky situations and economic shocks leading to stronger instability decrease the economic well-being by restricting economic activities and causing both inflation and unemployment.

In recent decades, external shocks and crisis have been particularly characteristic for developing countries, because their economies are less diversified, have lower savings rate, and less developed national financial systems. Besides, those markets are largely open, and the existing mechanisms that should mitigate the impact of the factors of economic instability and block their distribution channels, are not enough efficient and need further development.

In this context, there is an increasing need for development and practical implementation of new concepts and methodological approaches for timely warning of crises in developing countries, in particular in Ukraine.

Analysis of the publications allows a conclusion about the need of model based test, for Ukraine’s economy, of the current channels and indicators of crisis spread with due regard to the peculiar features caused by the national specificity of economic development. The use of a system of such indicators of crisis avoidance would allow not only to define the global tendencies, but also to timely identify the existing threats.

Today we know two concepts revealing the essence of global fluctuations of economic variables and spread of economic crises. According to the first one, crisis spread between countries is related to the fundamental economic characteristics [2], and, according to the second one, crises are consequences of globalization, financial integration, externalities, and change of the behavior of investors or other financial agents [1]. From the analysis of the two concepts, it appears that the role of transmitting link of the crisis phenomena may be performed by the following channels: macroeconomic; trade and financial.

A model based testing of the action of the defined channels of crisis spread allows investigating the nature of the underlying mechanisms and defining the reasons of the phenomenon and obtaining the answer to the question about the possibility of avoidance or prevention of crises in Ukraine’s economy.

It is advisable to build a model to estimate the channels of spread of the world economic crisis of 2008 to Ukraine with regard to the specific character of this country’s economy. Based on work by Y.Fedorova and O.Bezruk [3], the theoretical model for the estimation of the channels of crisis spread in Ukraine’s economy may be written as the following formula:

(1)

where Y_t is a binary variable equal to 1 when the country is in crisis, and 0 if not; CA_t is the ratio of current account balance to GDP; CREDIT_t is the growth rate of requirements on banking credits; rGDP_t is the growth rate of real GDP; CPI_t is consumer price index; M_t is the growth rate of money supply (considered money aggregated М2 and М3); U_ILO_t is unemployment level calculated by ILO methodology; is ratio of exports and imports to GDP during period t; is the ratio of portfolio investments to GDP during period t; PFTS_t is national stock indexes during period t; PETROLEUM_t is index of Brent oil prices (ICE Brent), USD/barrel; SALDO_t is growth rate of capital and financial account; DEBT_t is growth rate of foreign national debt; and STAL_t is steel prices during period t.

Given the fact that, in the study of the channels of crisis transmission, dependent variable Y is binary, that is, takes the values 1 or 0, to solve the problem of selecting the indicators of negative economic events, one should use a binary choice model (e.g., probit- or logit-model), which reflects the dependence of the likelihood of a financial crisis on a number of economic indicators.

Thus on the basis of binary choice models and the concept of exchange market pressure, we have concluded that the most adequate for the purposes of prediction, in our study, is the three-factor model. It is defined that the variables affecting crisis spread in Ukraine’s economy include: national stock indexes during period t (PFTS_t); Brent oil price index (ICE Brent), in USD/barrel (PETROLEUM_t); ratio of current account balance to GDP (CA_t).

Based on the values of descriptive statistics, namely, McFadden R² statistics, difference between Log likelihood function and restricted log likelihood function, as well as the values of LR statistics, we proved that probit model is somewhat better than logit model so it is used to estimate the channels of crisis spread in Ukraine’s economy. Values of the coefficients of the probit model are shown in Table 1.

Table 1

Values of the coefficients of the probit model for estimation of the channels of crisis spread in Ukraine’s economy

Coefficients	Estimates
C0	–2,48
С1 (ratio of current account balance to GDP)	–25,12
С9 (national stock indexes during period t)	–0,01
С10 (Brent oil price index (ICE Brent), USD/barrel)	2,49

The subsequent step consisted in estimating the significance of the probit model as a whole. The excess of the value of the criterion of likelihood ratio 7,836 over the critical value 7,815 indicates that the equation as a whole is significant, i.e. Brent oil price index (ICE Brent), national stock indexes i during period t and the ratio of current account balance to GDP do affect the probability of crisis emergence. Coefficients C₁, C₉ are negative, i.e. with the increase in the values of the ratio of current account balance to GDP, as well as national stock indexes, probability of crisis emergence in Ukraine’s economy decreases. In turn, the positive value of coefficient C₁₀ indicates a rise of the probability of crisis emergence with higher oil price index. Thus it follows from model (1) that the spread of crisis in Ukraine took place along the financial, macroeconomic and trade channels.

The results of experimental calculations for the proposed model show that in the negative scenario of the development of macroeconomic situation, there is a high likelihood of financial crisis in Ukraine in 2016 (at up to 91%). However, the inertial development of the forecasted situation may be postponed with correcting measures of government economic policy in case of worsening of the dynamics of macro-economic parameters. Let us analyze possible negative effect on the development of Ukraine’s economy by each of the defined channels of crisis spread.

First, Accelerated growth of prices on global energy markets will lead to increased tariffs for natural gas for the population, will aggravate the problem of high inflation in Ukraine.

Secondly, Ukraine’s transition to the flexible exchange-rate regime, which, according to the analysis of literature sources, is related to a considerable number of threats and promotes the redistribution of Ukraine’s national income in favor of this country’s trade partners. As a result, Ukraine’s economy will face an increasing problem of the search of funds to finance the negative balance of current account, as well as the decrease in the revenue part of the budget.

Thirdly, Decrease in the investment attractiveness of Ukraine’s economy for foreign investors, which may have a negative effect on the development of the financial market, macroeconomic stability, balance of payment etc.

The above mentioned risks raise the probability of negative tendencies in the development of Ukraine’s economy in the short run. Thus, it is advisable to define measures to level such tendencies. Among them: strengthening of Ukraine’s energy independence, accelerated development of the energy sectors; reorientation of the raw material character of Ukraine’s economy to the production of items with a considerable share of value added, which should withstand competition not only on the domestic market, but also on the global one; the NBU’s weighted decision on the exchange regime in Ukraine, in particular, an assessment maintaining the regime of floating exchange rate; promoting efficient development of Ukraine’s stock market etc.

Conclusions. Thus, the statistically significant channels of crisis spread in Ukraine’s economy are the trade and financial channels and a group of macro-economic parameters (through corresponding indicators). It is exactly those channels that may act as transmission links of crisis phenomena in Ukraine’s economy in 2016. Corrective measures to avoid the expected negative tendencies of the development of Ukraine’s economy should be taken, in particular, competition on the domestic market should be supported through lowering a considerable number of administrative barriers, solution of the problems hindering innovative activities of Ukraine’s enterprises should be given. In particular, it concerns the instability of political situation, lack of efficient mechanisms for state regulation and control over the attraction of foreign investments etc.

Literature:

1. Calvo G., Mendoza E.G. Rational contagion and the globalization of securities markets. J. of Int. Econ., 2000, Vol. 51, pp. 79–113.

2. Eichengreen B., Rose A., Wyplosz C. Contagious currency crisis: first tests. Scand. J. of Econ., 1996, Vol. 98, pp. 463–484.

3. Fedorova E., Bezruk O. Analiz i otsenka kanalov raspostraneniya finansovykh krizisov na pazvivayushchikhsya rynkakh [Analysis and estimation of the channels of propagation of financial crises on developing markets]. Voprosy Ekonomiki – Questions of the Economy, 2011, No. 7, pp. 120–128 [in Russian].

4. Ramey G., Ramey V. Cross-country evidence on the link between volatility and growth. Amer. Econ. Rev., 1995, Vol. 85, No. 5, pp. 1138–1151.