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

Dzmitry Kruk

No 4, BEROC Policy Paper Series from 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.

Keywords: Belarus; equilibrium exchange rate; inflation expectations; financial dollarization; exchange rate regime (search for similar items in EconPapers)
Pages: 14 pages
Date: 2011-08
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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