The mechanism of adjustment to changes in exchange rate in Belarus and its implications for monetary policy

Knowing the fair value of the Belarusian ruble is one of the most vital issues for economic agents in 2011. In the second half of 2010 an aggressive expansionary policy led to significant macroeconomic fluctuations. Since then, the pressure for the currency market has been progressing. In March 2011, the multiplicity of exchange rates was de facto settled. Gradually the gap between the official rate and the market ones was increasing, which pushed the National Bank to devalue the official rate by 56% in May. Nevertheless, the uncertainty was not eliminated from the market and the growth of the gap between the market rate and the new official one continued.
As a rule, assessments of the equilibrium exchange rate are used to find solutions to such questions. The use of the “equilibrium exchange rate” as an approach is mostly applicable to the economies that employ a fixed exchange rate regime (with this or that extent of stability). Besides providing a quantitative benchmark, the methodology of using an equilibrium exchange rate estimation provides the background for understanding the process of adjustment to a new exchange rate in the economy. The latter seems much more important in terms of economic policy and understanding the patterns of the economy in the situation of a currency crisis.
This paper aims at visualising and predicting the adjustment mechanisms of the Belarusian economy to changes in exchange rate level and providing correspondent policy recommendations. The paper is organised as follows: Section 2 deals with the methodological issues associated with equilibrium exchange rate estimation and its specifics for Belarus and Section 3 is devoted to the analysis of the effect of the exchange rate pass-through on nominal exchange rate through to prices and its impact on the short-term equilibrium exchange rate. In Section 3, the overall conclusions and policy recommendations are provided.