Cross-border capital flows under the flexible exchange rate system: case of Ukraine

Abstract

The authors study the possibility of capital outflows regulation in conditions of financial liberalization, which will not decrease the country`s investment attractiveness. It is one of the main tasks for providing economic growth in developing countries. The international experience and International Monetary Fund position in the impact of the flexible exchange rate system providing on controllable capital export/import are considered. Ukraine`s government policy influence on the amount of capital export and the economic and political peculiarities of transition to a flexible exchange rate system are analyzed. Estimates of the influence of a flexible exchange rate system on the cross-border capital flows (and its regulation) were conducted using regression analysis based on quarterly data for 2014-2018 (the period when exchange rate volatility was observed). The authors concluded that the flexible exchange rate system stimulates the capital outflows when the macroeconomic situation in Ukraine remains unstable. This system, against high macroeconomic risks, ineffective economic policy, panic, and military-political threats, leads to capital losses in favor of developed economies. However, clarified that under these conditions the only way monetary policy was the abandonment of fixed exchange rate, which helped preserve foreign reserves, reduce the burden on the state budget and provide financial stability. The authors conclude that it is expedient to develop a mechanism, which, under the conditions of the flexible exchange rate system, will increase the FDI attractiveness.