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  • 29.03.2013

    The impact of exchange rate changes on imports of capital and high-tech goods: A quantitative assessment

    (Code:PP_01_2013)

    There are good economic reasons why the current foreign exchange policy of Ukraine should be changed towards a more flexible regime. Under current conditions, such a change will most probably involve certain depreciation, and affect a number of economic variables in turn. Specifically, policy makers are concerned about the impact on the import of capital and high tech goods, which play a major role for investment and thus contribute to the modernisation of Ukraine’s often outdated capital stock.

    In order to assess the quantitative impact of depreciation on these import categories, we use a simple trade simulation tool. Specifically, we model the effects of a 10% nominal depreciation, which we think is fundamentally justified, on the demand for capital and high-tech goods imports. 

    The results of our assessment can be summarized in the following table:

     

    Import category

    Import decrease, %

    % of total imports

    Capital goods

    13.1 – 17.3

    1.5 – 2.0

    High-tech goods

    9.0

    0.4

    Combined

    12.5 – 16.1

    1.7 – 2.2


    Using trade data for 2011, we arrive at import reductions in the relevant import categories of between 13-17% (for capital goods), 9% (high-tech goods) and 15-20% (combined). Given as a share of total merchandise imports, the reductions are in the range of 0.4-2.2%. However, our assessment is based on a set of strong assumptions, e.g. that exchange rate changes are fully and instantaneously reflected in local price changes, which are unlikely to hold in practice, and thus the results can be considered as a “worst case” scenario.  

    What lessons can policy makers draw from our analysis? Our quantitative assessment suggests that the direct negative effects of a depreciation of 10% on capital goods and high-tech goods imports are noticeable, but should not be overstated. Furthermore, a number of positive effects of a more flexible exchange rate on investment demand, for example reduction in interest rates/financing costs, a more stable macroeconomic environment, will likely outweigh such drawbacks, in particular in the medium and long-term.

    Attached file  (220.5 kb)
    Authors:  Kravchuk Vitaliy, Movchan Veronika, Robert Kirchner, Jörg Radeke
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