Studying the Relation between the Interest Rates and the Exchange Rate in Belarus under the Speculative Motives Assumption
Three alternative forms of relation between the interest rates and the exchange rate implied by the speculative behavior are tested. The uncovered interest parity, implying equal return of assets in home and foreign currency, is shown not to hold in Belarus. The uncovered interest parity with the risk premium, allowing for risk aversion of speculators, is provided with mixed evidence. The theory is conciliated with the data when the ‘peso problem’, i.e. very low probability of large-scale devaluation, is accounted for. The results are used to estimate the relation between the interest rate and the exchange rate under the speculative motives in Belarus and provide monetary policy recommendations and conclusions.
|Date of creation:||06 Nov 2009|
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