Abstract for: The Danger of Float: The Case of Ukraine

The paper presents a system dynamics model of exchange rate formation in Ukraine and studies a set of exchange rate policies in the climate of currency crises that occurred in 2014. The exchange rate model includes banking sector, international currency flows sector, and central bank model which includes a set of instruments used for exchange rate regulation. The model describes the effect of different exchange rate regimes under conditions of long-term balance of payment deficit, low national foreign reserves, economic recession, and high inflation rate. The results suggest that the use of pure float regime in Ukrainian case causes the intensive exchange rate volatility. Otherwise, the use of dirty float regime with moderate foreign currency interventions by central bank stabilizes the exchange rate in sort-run on the target level and enables the efficient implementation of pure float exchange rate regime. Despite the fact that the suggested policy requires international support in terms of international loans in order to increase international foreign reserves and cover foreign currency demand on the currency market, the central bank will be able to provide reverse interventions in long run and pay back loans.