The Effects of Domestic Currency Depreciation on Import Substitution: New Empirical Evidence from the Ukrainian Pork Industry

Economic theory states that currency devaluation reduces imports. However, tradability of inputs makes the effect ambiguous. This paper aims to test the hypothesis that, when the exchange rate pass-through is higher for input than for output prices in a given sector, the depreciation of the local currency can reduce profitability and output, leading to increased imports. We found partial confirmation of this hypothesis using a structural vector autoregression model for data from the Ukrainian pork sector for 2014 to 2020. Policymakers should consider that pork production is vulnerable to a weakening currency due to high dependence on exportable feed grains.

Automated summary

Economic theory predicts that currency devaluation reduces imports, but the effect is uncertain due to the tradability of inputs. This study examines the hypothesis that a higher exchange rate pass-through for input prices compared to output prices in a specific sector leads to reduced profitability, output, and increased imports when the local currency depreciates. Using a structural vector autoregression model, we find partial confirmation of this hypothesis in the Ukrainian pork sector from 2014 to 2020. Policymakers should consider the vulnerability of pork production to currency depreciation, given its dependence on exportable feed grains.