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The Mechanism of Adjustment to Changes in Exchange Rate in Belarus and its Implications for Monetary Policy

Author

Listed:
  • Dzmitry Kruk

    (Belarusian Economic Research and Outreach Center (BEROC))

Abstract

This paper aims at visualizing adjustment mechanisms in the Belarusian economy to changes in exchange rate level. It is shown, that in Belarus a high pass-through effect from exchange rate to prices plays a crucial role. This effect stems from a high rate of financial dollarization alongside with high and volatile inflation expectations. Because of this effect, actual equilibrium level of exchange rate might be rather volatile as well. If the National bank resorts to a kind of exchange rate peg, the gap between the actual level of the exchange rate and its equilibrium level may be pretty high. The latter leads to a lower credibility of such policy and enhance additional inflation and devaluation expectations. Furthermore, the procedure of assessment of the equilibrium level of exchange rate becomes much more complicated under high pass-through effect from exchange rate to prices. Hence, monetary policy based on a kind of exchange rate peg is argued to be not effective. A key policy recommendation is a necessity to introduce a robust nominal anchor by the Belarusian National Banks, which can stabilize expectations of the economic agents and mitigate the pass-through effect from exchange rate to prices.

Suggested Citation

  • Dzmitry Kruk, 2011. "The Mechanism of Adjustment to Changes in Exchange Rate in Belarus and its Implications for Monetary Policy," BEROC Policy Paper Series 04, Belarusian Economic Research and Outreach Center (BEROC).
    • Handle: RePEc:bel:ppaper:04
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    References listed on IDEAS

    as
    1. Mr. Peter Isard, 2007. "Equilibrium Exchange Rates: Assessment Methodologies," IMF Working Papers 2007/296, International Monetary Fund.
    2. Mr. Andreas Billmeier & Ms. Dalia S Hakura, 2008. "Trade Elasticities in the Middle East and Central Asia: What is the Role of Oil?," IMF Working Papers 2008/216, International Monetary Fund.
    3. International Monetary Fund, 2010. "Republic of Belarus: Selected Issues," IMF Staff Country Reports 2010/016, International Monetary Fund.
    4. repec:imf:imfops:2008/002 is not listed on IDEAS
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    Cited by:

    1. International Monetary Fund, 2015. "Republic of Belarus: Selected Issues," IMF Staff Country Reports 2015/137, International Monetary Fund.
    2. Amat Adarov & Kateryna Bornukova & Rumen Dobrinsky & Peter Havlik & Gabor Hunya & Dzmitry Kruk & Olga Pindyuk, 2016. "The Belarus Economy: The Challenges of Stalled Reforms," wiiw Research Reports 413, The Vienna Institute for International Economic Studies, wiiw.

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