THE IMPACT OF OIL PRICE CHANGES ON THE MACROECONOMIC PERFORMANCE OF UKRAINE by Oleg Zaytsev A thesis submitted in partial fulfillment of the requirements for the degree of MA in Economics Kyiv School of Economics 2010 Thesis Supervisor: Professor Iryna Lukyanenko Approved by _ Head of the KSE Defense Committee, Professor Roy Gardner _ _ _ Date Kyiv School of Economics Abstract THE IMPACT OF OIL PRICE CHANGES ON THE MACROECONOMIC PERFORMANCE OF UKRAINE by Oleg Zaytsev Thesis Supervisor: Professor Iryna Lukyanenko In this research we investigate the impact of oil price changes on Ukrainian economy Following existing literature the focus is on six macroeconomic variables: nominal foreign exchange rate, CPI, real GDP, interest rate, monetary aggregate M1 and average world price of oil Adhering to Cologni and Manera (2008) we allow for interconnection between the variables to exist and adopt SVAR/VECM approach for this purpose In particular, we choose between the two closely related model types based on cointegration properties of the data We succeed in detecting long-run equilibria, estimate VECM and further perform innovation accounting We find that oil price increases tend to deteriorate real economic activity in the short run (though with one month lag) as opposed to the long run The reaction goes through indirect effect, namely downward demand effect, which is characterized by contraction of aggregate demand in response to adverse oil supply shock Based on the results of IRF we further numerically confirm the validity of this channel Finally, we check if the asymmetry effect between oil price changes and real GDP response as discovered by Mork (1989) is present in Ukrainian data We find sustaining evidence in favor of symmetric response of real GDP to oil price increases/decreases in the short run TABLE OF CONTENTS CHAPTER INTRODUCTION …………………………………… CHAPTER LITERATURE REVIEW …… …… …………………… CHAPTER METHODOLOGY …………….………………………… ……… CHAPTER DATA DESCRIPTION ……………………… CHAPTER ESTIMATION RESULTS ……………………………… CHAPTER CONCLUSION ……………….………………………… BIBLIOGRAPHY ……………………………………………………… APPENDIX A, TIME SERIES DECOMPOSITION: RGDP, FX ……… APPENDIX B, REDUCED FORM VAR CASE OF ∆oil>0 …………… APPENDIX C, REDUCED FORM VAR CASE OF ∆oil0, ∆oil0 …………………… Reduced form VAR Case of ∆oil0) and decreases (∆oil or ∆oil0 (∆oil0 is statistically different from the case of ∆oil [∆oil < 0] ∆fx ∆cpi ∆rgdp ∆i ∆m1) T For simplicity we define the matrix of contemporaneous effects as ACHOLETSKY As it was already discussed this matrix is needed for innovation accounting, namely IRF Appendix B contains estimation results of the reduced form VAR in differences with oil price variable being replaced by oil price increases (∆oil>0) The same model, but for oil price decreases (∆oil0, ∆oil0 ∆oil0) is approximately the same as the 44 one to the shock in oil price decreases (∆oil0 and 19.55 in case of ∆oil