Foreign Exchange Regimes in (Normal Times and) Times of War: Insights From Ukraine

ABSTRACT On February 24, 2022, as Russia invaded, the National Bank of Ukraine switched from a flexible to a fixed‐exchange rate regime. Was this optimal? We develop a tractable but carefully calibrated open‐economy model of Ukraine with nominal rigidities and frictions in international financial markets. We find that the optimal response to small shocks is exchange rate flexibility, whereas to large (invasion size) shocks, currency depreciation is suboptimal and a Taylor‐type rule may fail to admit an equilibrium, prompting the switch to a fixed‐exchange rate regime. For robustness, we also consider risk‐premium and non‐tradable supply shocks, international reserves, and capital controls.