CURRENCY SUBSTITUTION IN UKRAINE: BEHAVIOR OF HOUSEHOLDS

Veronika MOVCHAN (Institute for Economic Research and Policy Consulting, Kyiv, Ukraine)

Liberalization of foreign exchange regime and instability of national currency are among the major factors that shaped the level and strength of currency substitution in Ukraine. In this paper, a problem of currency substitution is addressed from the point of view of households. It is argued that the most conventional measure of currency substitution, namely the ratio of foreign-currency denominated deposits to total deposits at a domestic banking system, is not obviously the best for households' currency substitution in Ukraine. Cash transactions on retail foreign exchange market are proposed as a complementary measure.

The paper presents a simply model of households' demand for various types of financial assets constructed on the basis of a portfolio-balanced approach. It is demonstrated that the choice of assets depends on real income of households, the rates of return on each of these assets, as well as stability and credibility of financial system. It is stated that there are two episodes in dynamics of currency substitution in Ukraine characterized by different motives of foreign currency holdings.