EFFICIENT MONETARY POLICY OPTIONS IN TRANSITION ECONOMY

Transcription

1 NATIONAL BANK OF THE REPUBLIC OF BELARUS EFFICIENT MONETARY POLICY OPTIONS IN TRANSITION ECONOMY COLLECTION OF REPORTS Second Inernaional Scienific and Pracical Conference May 19 20, 2008 Minsk 2008

2 Ediional Board: PhD in Economics Pavel V. KALLAUR; Docor of Economics Anaoly O. TIKHONOV; PhD in Economics Yury P. VLASKIN; Docor of Economics Аlexey Е. DAJNEKO; Docor of Mahemaics Мikhail M. KOVALEV; Docor of Economics Vasily N. KOMKOV; PhD in Economics Nikolai V. LUZGIN; Docor of Economics Irina V. NOVIKOVA; Docor of Economics Vladimir I. TARASOV; Docor of Economics Yury М. YASINSKY. Referees: Docor of Economics Anaoly O. TIKHONOV; Docor of Economics Vasilij N. KOMKOV; PhD in Economics Alexandr V. LOBANOV; PhD in Economics Naalya L. MIRONCHIK. Efficien Moneary Policy Opions in Transiion Economy: Collecion of Repors of Second Inernaional Scienific and Pracical Conference, Minsk, May 19 20, 2008 / Ediional Board: P.Kallaur, A.Tihonov, Y.Vlaskin e al. Minsk: NBRB, p. The purpose of he Conference is o share recommendaions wih respec o improving developmen and implemenaion of he moneary policy, and exend inernaional relaions and cooperaion beween he praciioners and research workers in he moneary sphere. Naional Bank of he Republic of Belarus Address 20, Nezavisimosy Ave., Minsk, Belarus. Telephone Inerne hp:// Fax All righs reserved. Reproducion for educaional and non-commercial purposes is permied provided ha he source is acknowledged. The views expressed in hese papers do no necessarily reflec hose of he Naional Bank of he Republic of Belarus. This collecion of repors can be downloaded from sie of he Naional Bank of he Republic of Belarus.

3 Conen 3 Yury Alymov Macroeconomic Condiions and Peculiar Feaures of he Republic of Belarus Moneary Policy Implemenaion a Curren Sage 5 Alexandr Lobanov Analysis of Moneary Mechanism Funcioning in Belarus 12 Anaoly Tikhonov Informaion Efficiency of Financial Marke: Theoreical Concep and Insiuional Srucure 25 Vasilij Komkov, Mikhail Demidenko Impac of he Exchange Rae Facor on he Secors of he Belarusian Economy 32 Naalya Mironchik, Mikhail Demidenko The Role of he Quarerly Projecion Model in Moneary Policy of he Republic of Belarus 39 Anne-Marie Gulde Exchange Rae Regimes for Transiion Economies: Were Currency Boards an Efficien Choice? 51 David G Mayes Alernaive Roues o Price Sabiliy 67 Franz Seiz Ineres Rae Seing, Money and he Role of he Oupu Gap 78 Daniyar Akishev On Moneary Policy of he Naional Bank of Kazakhsan in Condiions if Financial Insabiliy 90 Nikolaychuk Sergei Deerminaion of Inflaion Targes for Ukraine 96 Alexandr Borodin, Elena Gorbova, Sergey Plonikov, Yulia Plushchevskaya Anca Adriana Gălățescu, Esimaing Poenial Oupu and Oher Unobservable Variables Using Moneary Policy Transmission Model (he Case of Russia) 105 Bogdan Rădulescu, Mihai Copaciu Poenial GDP Esimaion for Romania 126 Aleksejs Meļihovs, Gundars Dāvidsons The Role of Producion Progress and Human Capial in he Economic Growh of Lavia 147 Oxana Babeskaia- Kukharchuk Transmission of Exchange Rae Shocks ino Domesic Inflaion: The Case of he Czech Republic 160 Conference May 19-20, 2008, Minsk

4 4 Michał Brzoza- Brzezina, Tomasz Chmielewski, Joanna Niedźwiedzińska Subsiuion beween domesic and foreign currency loans in Cenral Europe. Do cenral banks maer? 182 Omar A. Mendoza Lugo The Differenial Impac of Real Ineres Raes and Credi Availabiliy on Privae Invesmen:Evidence from Venezuela 199 Azer Aleskerov Opimal Moneary Policy Sraegy During he Huge Foreign Exchange Inflows 229 Musafo Niyozov Feaures of Moneary Programs in Small Economies 233 Vladimir Tarasov Theoreical Aspecs of Currency Regulaion, Balance of Paymens and Ani-Inflaion Policy Saus 239 Vladimir Usosky Resricions o Moneary Policy Choice in Belarusian Economy 250 Sergey Kalechis, Naalya Koloonchik Improving Moneary Policy in he Economies in Transiion: Making Choices abou Effecive Regime or Enhancing he Efficiency of he Chosen Regime? 266 Ryzhkovskaya Oksana Approaches o he Regime Choice and Crieria of he Opimal Moneary Policy of he Transiion Period 272 Lepushynskyy Volodymyr Lines of Moneary Transmission Opimizaion under Condiions of Transiion Economy 280 Anaoly Belzesky Shaping and Funcioning of he Corporae Bonds Marke in Condiions of Transiion Economy 288 Dmiry Kruk Opimal Insrumens of Moneary Policy Under he Regime of Inflaion Targeing In Belarus 305 Naalia Lazareva The Developmen of Morgage Lending Marke in a Transiion Economy: Problems and Perspecives 323 Naional Bank of he Republic of Belarus

5 Yury Alymov 1 5 Macroeconomic Condiions and Peculiar Feaures of he Republic of Belarus Moneary Policy Implemenaion a Curren Sage The Republic of Belarus is a dynamic open economy. Over he pas few years, he counry has been ensuring high economic growh raes and has been dynamically increasing invesmens. A he same ime, some curren problems and macroeconomic risks in he economy pose challenges whose ackling will be faciliaed by improving condiions for economic performance and by providing simuli o he business iniiaive. In such circumsances moneary policy mus be aimed a promoing economic growh, above all, by delivering sabiliy of he naional currency and ensuring moneary insrumens adequae response o he changes in he environmen and inernal macroeconomic condiions. The process of economic ransformaion in he Republic of Belarus is heading in he same direcion as in oher economies in ransiion. Therefore, he main characerisics of is moneary policy and curren asks are, basically, much he same as moneary policy orienaion in oher counries which find hemselves a differen sages of he ransformaion period. A he same ime, a number of peculiar feaures of he Belarusian economy and he specific characer of cerain approaches o he paradigm of social and economic developmen have deermined he specific characer of he ransmission mechanism funcioning and, accordingly, some aspecs of moneary policy developmen and implemenaion. On he whole, he Belarusian economy can be characerized as a small open economy. Under he geographical division of labor which emerged during he Sovie era, i specialized, above all, in he assembling and processing indusries and funcioned as par of a single complex. This deermined he srucure of he economy inheried by Belarus which is based on large enerprises currenly dominaing engineering, oil processing, perochemical, and chemical indusries. Such srucure of he economy, considering he exising echnologies, makes i possible o ensure he compeiiveness of domesic indusries in a number of exernal markes. The counry s major foreign rade parners are Russia, he Neherlands, Ukraine, Germany, Poland, and he UК. The Russian Federaion is he main rading parner in erms of boh expors and impors. I should be noed ha srong posiions of he Belarusian goods in he Russian marke made a significan posiive impac on he economic growh raes in he Republic of Belarus. This was due o he fac ha high growh raes of energy prices which have been observed over he pas few years consiued a srong simulus o he economic growh in he Russian Federaion and resuled in an increase in he domesic demand in he Russian economy. This se precondiions for he expansion of Belarusian expors o Russia and, accordingly, became a significan facor behind he economic growh in our counry. GDP growh raes in exceeded 109% a year, on average. During , capial invesmens ino fixed capial grew by nearly 120% amouning o 131.5% in Beginning in 2001, he GDP volume in dollar erms grew more han 3.5 imes, while capial invesmens ino fixed capial more han 6 imes. 1 Firs Depuy Chairman of he Board, Naional Bank of he Republic of Belarus Conference May 19-20, 2008, Minsk

6 6 Mainaining aained high raes of economic growh is he mos imporan ask because i is a prerequisie for he promoion of he Belarusian economy s compeiiveness in he inernaional arena and, in he long run, he improvemen of he counry s living sandards. I s worh menioning ha despie dynamic developmen of he Belarusian economy here are sill some problems ha have no been ackled, namely: 1. Heavy ax burden which curbs economic and invesmen aciviy of enerprises, privae secor developmen, and he compeiiveness of Belarusian goods in he domesic and exernal markes. In 2007, he income/gdp raio was 50%; 2. High depreciaion of he acive par of fixed asses which has an adverse impac on he producion compeiiveness and efficiency; 3. Underdevelopmen of small and medium-size business; 4. Resriced growh raes of he financial marke; 5. Demographic rends owards he ageing of he populaion which will subsanially increase, in he fuure, he load no only on he pension sysem bu on healh care as well; 6. The economy s vulnerabiliy wih respec o exernal influence owing o poor diversificaion of expors and impors, on he one hand, fuel and energy balance, high consumpion of energy and maerials, and dependence on he prices for impored fuel and energy, on he oher; 7. Scarciy of invesmens o modernize fixed asses; 8. Inadequae innovaive aciviies and lack of he mechanism o ransfer new knowledge and echnologies from abroad, including by means of he foreign invesmens aracion; and 9. Banking risks resuling, above all, from he financial sanding of enerprises as well as adminisraive regulaion. As a resul, hese problems give rise o a number of asks whose ackling is deemed necessary a he sae level and is mandaed by he Program of Socio-economic Developmen of he Republic of Belarus for The enire governmen economic policy of he Republic of Belarus is aimed a he implemenaion of his Program, including moneary policy as is inegral par. The five-year Program idenified he following prioriies for he economic developmen: all-ou harmonious developmen of man on he basis of raising real moneary incomes and qualiaive improvemens in educaion, healh care, culure, physical raining and spors, and housing as well as oher service indusries; innovaive developmen of he naional economy; augmenaion of expors poenial on he basis of enhancing he compeiiveness of he naional economy; developmen of he agro-indusrial complex and social developmen of he rural area; conservaion of energy and resources; and developmen of small and medium-size owns. As a resul of implemenaion of measures sipulaed by he Program he oupu in 2010 will noiceably grow compared wih 2005: Naional Bank of he Republic of Belarus GDP by %; indusrial oupu by %; agriculural oupu by %; capial invesmens by %; producion of consumer goods by %; and foreign rade in goods and services by %, including expors by % and impors by %.

7 GDP energy inensiy is planned o fall by %. Housing provision funded from all sources is o increase by %. 7 Mainaining sabiliy of he naional moneary uni is deemed o be he mos imporan moneary policy conribuion o he aainmen of high raes of economic growh. Imporanly, during negaive economic rends of he 1990s caused by he budge imbalance and sizeable credi emission were reversed. The eliminaion of he exchange rae mulipliciy in Sepember 2000 made i possible o pursue more effecive exchange rae policy. The implemenaion of he mechanism of moneary policy based, above all, on he use of he naional currency exchange rae as a nominal anchor was conducive o curbing inflaionary and devaluaion processes as well as moneary sabilizaion. Where in 2001 inflaion rae measured by he CPI growh amouned o 46.1%, in 2006 i was down o 6.6%. While in 2001 he nominal exchange rae of he Belarusian ruble agains he US dollar devalued by 33.9%, 2006 saw is revaluaion by 0.6%. Slowing inflaionary and devaluaion processes o a sufficienly low level was he mos imporan oucome of moneary policy implemenaion creaing a favorable background for he aainmen of high economic growh raes. A he same ime, he Belarusian economy was facing in 2007 a number of new processes and facors, above all, in he economy s exernal secor which had a significan impac on moneary policy implemenaion and se a series of new asks requiring he moneary auhoriy o neuralize adverse effecs. Among such facors which brough abou a change in he exernal condiions of he Belarusian economy performance are, firs and foremos, he following: changes in he erms of Russian energy supplies, including a wofold increase in prices for naural gas; increasing volailiy of he exchange raes of he main world currencies as well as he of he naional currencies of he saes - foreign rade parners of he Republic of Belarus; rising prices for cereal and oil crops in he global markes (mainly because of he decrease in crop yields) as well as for milk and dairy producs owing o he falling volume of milk producion, increasing demand for dairy producs, and he removal of farm subsidies on milk producion in he EU counries; he US sub-prime morgage crisis which hi a number of markes, including ha of Wesern Europe; and acceleraion of inflaionary processes in he neighboring counries conneced, somehow, wih he above facors. Changing erms of Russian energy supplies is he mos significan facor as regards he scope of impac on he economy of our counry. Taking ino consideraion heavy dependence of domesic enerprises on Russian energy supplies which is condiioned, on he one hand, by insufficien diversificaion of energy impors and, on he oher hand, by relaively high energy inensiy of producion as well as a large share of expors of refined producs in oal expors of he Republic of Belarus, his facor enailed a number of consequences, such as: growing producion coss of enerprises which resuled in a greaer srain on heir financial sanding as well as cerain reducion in heir invesmen opporuniies; increasing price volumes of impors and corresponding deerioraion of he counry s balance of rade; growing inflaionary and devaluaion expecaions which resuled in an increasing demand for foreign currency in he domesic foreign exchange marke in he early 2007; and Conference May 19-20, 2008, Minsk

8 8 increasing inflaionary pressure which manifesed iself, above all, in he early 2007, in he acceleraion of growh raes of he PPI for indusrial producs. Oher above-menioned facors which emerged in he global markes also conribued o higher inflaionary pressure in he Belarusian consumer s marke. The naional economy suffered from he shorage of liquidiy in he global financial markes leas of all. This was due o he fac ha he volume of exernal borrowings by he Belarusian banking secor is no large because he banking secor s susainabiliy does no depend, in large measure, on he access o exernal resources. Deerioraing macroeconomic condiions of moneary policy implemenaion and, above all, he exernal environmen required a number of acical measures. The prioriy ask was o normalize he siuaion in he foreign exchange marke which was aained hanks o he implemenaion of a number of arrangemens. These included an increase in he refinance rae by one percenage poin, a more significan growh of raes (up o 20%) on refinancing operaions carried ou by he Naional Bank, as well as an absolue mainenance of he Belarusian ruble exchange rae a he prescribed level. This made i possible o preserve he confidence of he households and enerprises in he naional currency, o diver households moneary funds from he foreign exchange marke ino deposis in Belarusian rubles, and o preserve he resource base of he banking secor. Exchange rae policy mainaining he exchange rae of he Belarusian ruble agains he US dollar wihin he band se by he Republic of Belarus Moneary Policy Guidelines for 2007 played an essenial role in ani-inflaionary policy over he enire year. As he Russian ruble is becoming increasingly sronger agains he US dollar, he efficiency of he simulaneous use of wo exchange rae arges agains he US dollar and he Russian ruble - significanly decreased. Because of his, he exchange rae of he Belarusian ruble agains he US dollar as he main currency of he domesic foreign exchange marke, households foreign exchange savings, as well as foreign rade selemens, including he Russian Federaion, was acually used as a prioriy exchange rae arge. A he same ime, he US dollar dynamics wih respec o major global currencies was conducive o decreasing he real effecive exchange rae of he naional currency and, accordingly, mainaining price compeiiveness of he Belarusian expors. I is worh noing ha ani-inflaionary measures of moneary policy combined he impac of boh exchange rae policy and ineres rae policy which was aimed a ensuring a balance beween money demand and supply in he economy. The dynamics of ineres raes during he year made i possible o avoid addiional shocks which could deeriorae he financial sanding of enerprises in he nonfinancial secor of he economy as well as adversely affec he susainabiliy of he financial secor. Boh he opporuniy for credi suppor of enerprises and high growh raes of invesmens in fixed capial required o coninue he economy s modernizaion wih a view o ensuring is compeiiveness were mainained. A he same ime, ineres raes faciliaed coninued growh of he raio of he banking secor s resources and he scale of is operaions o GDP. Also, growh raes of he moneary aggregaes subsanially slowed wih respec o he previous year which was one of he facors curbing inflaion. For example, he acive ruble money supply (M1) increased over he year by 24.4% (in 2006 M1 grew by 42%). The ruble money supply (M2) increased by 29.2% (in 2006 M2 grew by 44.5%). Naional Bank of he Republic of Belarus A he same ime, he oaliy of he above-menioned adverse facors deermined subsanially higher, compared wih he forecas, inflaion raes. In he whole of 2007, he CPI grew by 12.1%, he forecas being 6 8%. However, sufficienly high raes of economic growh were mainained. GDP increased by 8.2% agains he previous year which allows us o view, on he whole, he resuls of moneary and general economic policy implemenaion favorably.

9 The Republic of Belarus Moneary Policy Guidelines for 2008 are aimed a mainaining and consolidaing posiive rends in he economy. Preserving major approaches and principles ha have proven o be posiive, curren moneary policy measures ake ino accoun he experience of neuralizing he impac of adverse environmenal rends gained in The moneary policy objecive in 2008 is o proec and ensure he Belarusian ruble sabiliy, including is purchasing power and he exchange rae agains foreign currencies. The main means o aain his objecive will be mainaining he Belarusian ruble sabiliy agains he US dollar. The exchange rae is sipulaed o flucuae wihin he plus-minus 2.5% band wih respec o he exchange rae as a he beginning of he curren year, i.e. wihin he year he exchange rae will be approximaely in he range of 2,100-2,200 Belarusian rubles versus he US dollar. I is planned o coninue o increase he role of he ineres rae as a moneary insrumen and enhance he efficiency of ineres rae policy. In doing so, he principles of ineres rae policy ha proved o be posiive in he pas few years will be preserved, firs of all, he mainenance of ineres raes a he level which is conducive o he growh of savings in he naional currency and he expansion of credi availabiliy for economic agens. The overall dynamics of ineres raes will be defined by he refinance rae. Based on he assessmen of key macroeconomic indicaors, he projeced inflaion rae being 6-8%, a reducion in he annual refinance rae o 7 9% by he end of 2008 is deemed possible. By he end of 2008, ineres raes on new erm deposis and on bank loans o enerprises and households may amoun o 7-10% and 10 12%, respecively. Wih he demand for banking services from he non-financial secor of he economy and households growing, furher enhancemen of banking secor susainabiliy in 2008 will be a prioriy. In building up banks capial, i will be necessary o ake ino accoun he need for boh ensuring heir susainabiliy and mainaining invesmen araciveness of he banking secor. Banks capial is esimaed o grow by 21% and reurn on capial o exceed 8%. Enhancing efficiency and funcional relevance of he banking secor will manifes iself in coninued faser growh of banks asses compared wih GDP. For example, he banking secor s asses and he resource base of he banks are forecased o grow by 37%, wih he banks asses/gdp raio increasing up o 47.8% by he end of The volume of households deposis wih he banks is projeced o increase over he year by 3.7 rillion Belarusian rubles. This forecas is based on he increase in he households moneary incomes and he srucure of prospecive spending, he decrease in he inflaion rae, and he expansion of he lis of banking operaions and services along wih heir qualiy improvemen. In addiion, by he end of 2008 he legal persons deposis wih he banks will grow by 3.4 rillion Belarusian rubles. The major facors of heir growh will be as follows: growing sales of producs, goods, works, and services owing o he oupu growh and he reducion of he sock of finished goods in indusry o he branch levels, he sock of commodiies in rade, and consrucion in progress; growing moneary share in he oal proceeds from he sale of producs, goods, works, and services arising from he reducion in he share of non-moneary forms of selemens and unpaid proceeds; growing profiabiliy semming from he reducion of maerials, energy, and labor inensiy in he producion of producs, works, and services; Conference May 19-20, 2008, Minsk

10 10 reducion of loss-making organizaions by means of enhancing heir efficiency; and ax burden reducion. Sipulaed volumes of lending represen an increase in he scope of banks paricipaion in he developmen of he economy s real secor and he ackling of social problems. Bank loans will play an increasing role in GDP formaion and naional wealh growh. Banks claims on he economy will increase by 41% amouning o 35.8% of GDP. Invesmen lending in 2008 is projeced o amoun o 5.7 rillion Belarusian rubles. Banks will mainain high qualiy of heir asses. The share of problem asses in he asses subjec o credi risk will no exceed 4%, he share of cliens and banks problem indebedness on credi operaions 2%. A he same ime, as experience of many economies in ransiion shows, he implemenaion of moneary measures alone canno assure he success of ani-inflaionary policy in he long run. The resrucuring which provides inernal simuli for he growh of producion and invesmens as well as promoes he growh of foreign direc invesmens is insrumenal a he ime of economic changes. The work o review legislaion regulaing he erms of economic aciviies sared by he Governmen and he Naional Bank in 2007 is par of effors o provide a more favorable economic environmen. This work is designed o drasically improve business climae in he counry which will enable he Republic of Belarus o rank among 25 global economies wih he mos favorable business environmen. I is well known ha a presen, according o he annual repor Doing business by he World Bank and IFC, he Republic of Belarus ranks 110 h among 178 counries covered by he survey. Of course, he mehodological basis of his survey and he correcness of individual conclusions can be debaed, however one canno bu agree ha measures designed o subsanially change business climae in he counry are well-imed and necessary, and fully correspond o he general rend se forh in he Program of Social and Economic Developmen of he Republic of Belarus for Business climae in he Republic of Belarus is expeced o be radically improved, above all, hanks o: subsanial reducion of procedures and ime required for incorporaing a company, licensing, propery regisering, formalizing inernaional ransacions, and closing a company; gradual reducion in ax burden and sreamlining he axaion sysem; and legislaive and judicial proecion of invesors and he sreamlining of conrac implemenaion procedures. Furher ransformaion of ownership righs will be faciliaed by: cancelling he insiuion of Golden share in he Republic of Belarus; phasing ou limiaions o he alienaion of socks (shares) in he auhorized capial of commercial organizaions esablished in he process of denaionalizaion or privaizaion; and reamlining procedures for he making decisions regarding he disposal of sae-owned propery, including land. Creaion of relevan financial insrumens, insiuions, and mechanisms for heir funcioning would faciliae he formaion of an efficien domesic financial marke, above all, by means of: Naional Bank of he Republic of Belarus cuing axaion on corporae securiies operaions; lising and selling blocks of shares in Belarusian enerprises, including large enerprises; creaing equal condiions of operaion for privae and sae-owned insurance organizaions; and

11 creaing efficien invesmen funds and oher non-bank financial insiuions. 11 Oher areas of he invesmen climae improvemen include: creaing he mos favorable condiions for foreign invesors in small selemens, including in erms of ax reducion, adminisraive conrol, proecion guaranees agains adverse changes in legislaion during five years, and he righ o have foreign insurers insure heir propery ineress; improving condiions for he esablishmen and operaion of residens of free economic zones; and encouraging he developmen of innovaive producion, also wih he paricipaion of foreign invesors, including a complex of organizaional, fiscal, and oher measures aimed a acceleraing innovaive aciviies. A series of decrees and edics of he Presiden of he Republic of Belarus providing new simuli for business and invesmen aciviies have already been adoped as par of hese measures, oher regulaory acs being in he process of preparaion. An improvemen in business climae may prove o be, in our opinion, a significan facor in mainaining high raes of economic growh and aaining arges of social and economic developmen in Belarus. This will favorably affec he process of furher srenghening of he counry s banking secor and increasing is funcional significance in he economy. Maximal assisance for he processes of economic growh, above all, by ensuring inernal and exernal sabiliy of he naional moneary uni is he ask of moneary policy under hese circumsances. To his end, he coninuaion of he evoluionary developmen of he hierarchy of moneary objecives and inermediae arges, he sreamlining of he sysem of moneary policy insrumens, he sudy of he ransmission mechanism in he economy of he Republic of Belarus, and he developmen of he mahemaical modeling of economic processes mus be ensured. Conference May 19-20, 2008, Minsk

12 12 Alexandr Lobanov 1 Analysis of Moneary Mechanism Funcioning in Belarus One popular American exbook conains a phrase mean o make an example: "The main ask of he FRS /he Federal Reserve Sysem he Cenral Bank of he USA/ is o lay down a firm foundaion of moneary policy in order o ensure a high and sable level of producion of goods and services" (Miller, 2001). I appears o be fair for each counry because he moneary secor is par and parcel of he economic sysem of a sae. Therefore, he moneary policy mechanism mus also be considered as par of a single economic mechanism ha is implemening sable exended reproducion. Accordingly, a sysemaic analysis of he moneary mechanism reflecing inerrelaion of he moneary secor wih oher secors of he economy, as well as coordinaion of objecives and insrumens of moneary, fiscal, foreign economic, and producion regulaion would enhance moneary policy effeciveness. In he Republic of Belarus, consideraion and esimaion of a variey of moneary mechanism channels as well as he adverse effec of macroeconomic measures on he moneary secor are considered, above all, from he organizaional and mehodical poin of view. Organizaion of Moneary Policy Developmen and Implemenaion Aricle 4 of he Banking Code of he Republic of Belarus prescribes ha moneary policy is a componen par of a single sae economic policy. A he same ime, Aricle 24 specifies ha he Naional Bank is independen in is operaion. In accordance wih hese principles, moneary policy is formulaed and implemened as par of a single process of developing and implemening moneary policy sraegy and acics. In doing so, inernal coordinaion of arrangemens aimed a developing he moneary secor as well as exernal coordinaion hereof wih he direcions of evoluion of oher economy secors are ensured. Therefore, hree key sages of moneary policy developmen and implemenaion could be idenified in he sysem conex (figure 1). Sage 1. Defining sraegic macroeconomic and moneary objecives, mehods and means of heir achievemen. This sage includes he design of long- and medium-erm programs. In accordance wih he world pracice and economic conceps he said programs consiue a sraegic basis for jusifying he implemenaion mechanism of boh macroeconomic and moneary policies. The programs define parameers of major objecives; direcions of macroeconomic developmen of he sae and is moneary secor; fundamenal principles and means of he achievemen hereof, he main objecives being he achievemen of susainable economic growh; high employmen level; price sabilizaion; foreign economic balance; and, based hereon, improvemen of living sandards. Forecass are based on he analysis of social, economic, populaion, and ecological environmen, scienific, echnological and producion capaciies of he counry, exernal condiions, naural resources and prospecs of changes of he said facors. Besides, forecass are made in several varians, aking ino consideraion probabilisic changes and he exen of influence of inernal and exernal economic and oher reasons. Naional Bank of he Republic of Belarus 1 Naional Bank of he Republic of Belarus, Ph. D. of Economics.

13 Figure 1: Scheme of moneary policy developmen and implemenaion 1. Developmen of sraegic macroeconomic and moneary objecives, as well as mehods and means of heir achievemen 1.1. The naional sraegy of susainable social and economic developmen for a 15-year period; 1.2. The main direcions of social and economic developmen for a 10-year period; 1.3. Medium-erm programs of social and economic developmen; 1.4. Programs of long- and medium-erm developmen of individual secors and indusries of he economy and regions; 13 Program of Developmen of he Banking Secor of he Economy of he Republic of Belarus for ; 1.5. Conceps of developmen and fundamenals of mechanisms of moneary insrumens 2. Coordinaed developmen of acical social, economic and moneary programs for he subsequen year 2.1. Economic and social developmen forecas; 2.2. Forecas of he balance of paymens; 2.3. Sae budge; 2.4. Moneary policy guidelines; 2.5. Secoral and regional social and economic programs; 2.6. Join plan of acion of he Council of Minisers and he Naional Bank designed o achieve he parameers of social and economic developmen, budge, and moneary policy guidelines 3. Implemenaion of moneary policy measures during he year 3.1. Moneary operaions quarerly macroeconomic and moneary forecass, adjusing operaional asks and insrumens; monhly seing moneary arges, esimaing he refinance rae; analyzing he parameers of banking secor and paymen sysem developmen; weekly banking secor's liquidiy forecas, making moneary operaions plan; esimaion of fixed ineres raes of he Naional Bank of he Republic of Belarus; promp analysis of he banking secor and paymen sysem performance; daily а) coninuous collecion and analysis of informaion: promp forecass of banks' liquidiy; analysis of banks' bids; agreeing he lis and parameers of operaions; б) conducing moneary operaions; 3.2. Regulaory and organizaional insrumens aking, if necessary, decisions regarding regulaions governing he banking secor and he paymen sysem, as well as regarding organizaional aciviies in accordance wih he funcions of he Naional Bank of he Republic of Belarus Conference May 19-20, 2008, Minsk

14 14 In accordance wih he Law "On Sae Forecasing and Programs of Social and Economic Developmen of he Republic of Belarus", wo major long-erm documens he naional sraegy of susainable social and economic developmen and guidelines of social and economic developmen for 15- and 10-year periods, respecively, are o be developed. Medium-erm social and economic developmen programs, in urn, are designed o ensure coninuiy of a long-erm economic sraegy. These 5-year programs are considered o be he mos significan documen ha deermines he developmen of he counry's economy in he foreseeable fuure. A he same ime, economic sabilizaion, accumulaion of he domesic and world heoreical and pracical experience, and, accordingly, he expansion of he possibiliy of real esimaion of he consequences of srucural and insiuional changes resuled in an increase in he imporance of medium-erm programs. A he same ime, in long- and medium-erm programs, moneary policy which is aimed a he achievemen of common sraegic objecives by means of ensuring he soundness of he naional currency, increasing banking sysem liquidiy and soundness of he banking sysem, and ensuring he effecive and secure funcioning of he paymen sysem, sands ou agains oher significan means and financial and economic mechanisms. Besides, i is imporan o noe ha condiions of implemenaion and parameers of macroeconomic programs serve as a basis for preparing relevan forecass and programs of developmen of virually all secors of he economy and regions of Belarus. To assis in he implemenaion of social and economic developmen of he counry, and as par of meeing he arges and parameers, he 5-year Program of developmen of he banking secor of he economy of he Republic of Belarus for is being implemened. This program deermines he following objecives of banking secor developmen: firs, enhancing sabiliy and effeciveness of he banking secor; and, second, improving and updaing he lis of banking insrumens in line wih he increasing needs of he economy and households. I is worh noing ha, based on he sraegic objecives, asks, means, and mechanisms of moneary policy deermined wihin he framework of said programs, he concepual direcions of he developmen of insrumens of he Naional Bank as well as basic regulaions regarding heir implemenaion and funcioning are devised a he Naional Bank. These include: he Concep for developing he naional paymen sysem of he Republic of Belarus unil 2010 which akes accoun of he world rends, he Concep for developing he sysem of non-cash selemens of reail paymens unil 2010; he Principles of foreign exchange reserves managemen by he Naional Bank of he Republic of Belarus; he Principles of regulaion of he banking sysem's curren liquidiy by he Naional Bank of he Republic of Belarus, and ohers. Overall, he Republic of Belarus has esablished quie clear procedures, which are in line wih he world experience, for he design of long- and medium-erm macroeconomic and moneary programs. Sill, i is necessary o srenghen he financial par of he programs, and ake ino accoun more foreign economic facors, which, in addiion o he developmen of he mehodological and informaion mechanism, implies amending he Law "On Sae Forecasing and Programs of Social and Economic Developmen of he Republic of Belarus". Naional Bank of he Republic of Belarus There is a need for he developmen of shor-erm acical objecives and measures (hey are being developed a presen), wih a view o meeing he sraegic objecives esablished a he curren sage, as well as ensuring he relevan forecas rends and srucural changes. Sage 2. Coordinaed developmen of acical social, economic, and moneary programs for he subsequen year.

15 This sage implies coordinaed analyical and forecas work primarily aimed a preparing key documens: forecas of economic and social developmen of he counry, including is balance of paymens; sae budge; and moneary policy guidelines. They also serve as a basis for devising secoral and regional programs. 15 Imporanly, he parameers of social and economic developmen forecas form he basis for drafing he republican and local budges and moneary policy guidelines. A he same ime, he financial and moneary proporions, worked ou on heir basis, migh necessiae cerain adjusmens of he iniial arge esimaion of macroeconomic indicaors. Therefore, he procedure for preparing said hree documens is ieraive. In accordance wih he Banking Code, moneary policy guidelines are considered o be a legal framework of moneary policy of he Republic of Belarus. They include key parameers of moneary sphere developmen, deermine objecives, asks, and prioriies of sae moneary policy, and provide for a complex of aciviies and regulaion and conrol mechanisms aimed a ensuring heir implemenaion. In addiion, he qualiaive srucure of he Republic of Belarus Moneary Policy Guidelines akes accoun of he necessiy of coordinaed aainmen of moneary and macroeconomic objecives and herefore includes: brief characerisic of he economic siuaion of he counry; esimaion and analysis of implemenaion of key parameers and usage of he moneary policy insrumens in he curren year; key parameers of he forecas of social and economic developmen of he Republic of Belarus for each subsequen year, including he forecas of he main indicaors of he balance of paymens; key parameers and insrumens of moneary policy of he Republic of Belarus for each subsequen year; and aciviies aimed a he improvemen of he banking sysem, banking supervision, financial markes, and he paymen sysem of he Republic of Belarus. A he same ime, aking ino consideraion he increasing imporance of medium-erm macroeconomic and moneary forecass a a ime of sabilizaion and accumulaion of domesic and world heoreical and pracical experience is sabilized and accumulaed, i is possible o consider expanding he ime period of he Republic of Belarus Moneary Policy Guidelines, specifying he Banking Code provisions, in paricular, Aricle 4. I should o be noed ha he forecas moneary documens similar o he Republic of Belarus Moneary Policy Guidelines, are prepared and implemened by he cenral banks of a significan number of counries, hough he saus, form, and ime period of forecass vary due o differen economic and moneary regulaion sysems of he counries. A he same ime, we can single ou he rend of developmen of he Naional Bank's objecives and means as par of he processes of harmonizaion of aciviies of CIS cenral banks, EurAsEC (EuroAsian Economic Communiy), and oher inegraion srucures. Besides, he world moneary experience, including ha of he neighboring counries, is widely used. Yearly (saring from 2004) preparaion of a consolidaed documen, which combines he aciviies aimed a he achievemen of objecives of he developmen of all secors of he economy Join Plan of Acion of he Council of Minisers and he Naional Bank Aimed a Meeing he Targes of Social and Economic Developmen, he Budge, and Moneary Policy Guidelines for he Subsequen Year may be regarded as a logic compleion of he developmen of a single sae economic policy Conference May 19-20, 2008, Minsk

16 16 of he Republic of Belarus. I includes primarily measures ha, in order o be adequaely implemened, require coordinaed and quie long preparaion work, as well as exchange of informaion or consideraion when he Governmen and he Naional Bank carry ou paricular aciviies independenly. Sage 3. Implemenaion of moneary policy measures during he year aking ino consideraion exising economic and moneary rends. This sage reflecs aciviies required of all he services of he Naional Bank for he subsequen year. The dynamics during he year ha akes ino consideraion forecas economic rends and makes i possible o use a sysemic approach o prepare and implemen he enire se of moneary insrumens, is esimaed for he key moneary parameers. A he same ime, real changes in he economic and financial siuaion deermine he need for he coordinaion and adjusmen of he moneary insrumens on an ongoing basis. Therefore, moneary policy implemenaion, especially in he sphere of moneary operaions, includes gradual sages of preparaion of inerrelaed quarerly, monhly, weekly, and daily forecass and decisions during he year. They, accordingly, jusify and deermine condiions for conducing paricular moneary operaions, as well as applying regulaory means and carrying ou organizaional aciviies (Lobanov, 2006). Virually all he insrumens of he Naional Bank are aimed a he economic regulaion of he banking secor which provides he non-financial secor of he economy wih direc moneary suppor, conducing necessary asses, liabiliies, and agency operaions. Therefore, i would be appropriae o say ha i is banks ha form he insiuional foundaion of he moneary mechanism. However, as all financial marke segmens develop, he number of subjecs of he moneary mechanism should expand. The following hree groups of he Naional Bank inerrelaion wih he banks may be singled ou: moneary relaions; relaions in he course of banks' performance regulaion (direcly regulaory) ha are conneced primarily wih he sae regisraion of banks and licensing of banking aciviy, regulaion of and supervision over banks' aciviy regarding safe and liquid performance hereof, esablishmen of rules and procedures for banks' operaion, and coordinaion of cerain aciviies hereof; and relaions in he course of ensuring he funcioning of he paymen sysem, ha also affec banks' aciviy; Besides, addiional informaion relaions of he cenral bank wih he banking secor emerge deriving from hem. Eigh major forms can be idenified in he srucure of moneary relaions of he Naional Bank wih banks (figure 2). They reflec he funcional srucure of operaions of he cenral bank wih residen banks. The lis of operaions shows ha he Naional Bank and banks are he acive operaors in he moneary and foreign exchange markes, as well as in he securiies marke. Naional Bank of he Republic of Belarus

17 Figure 2: Major forms of moneary relaions of he Naional Bank wih banks Refinancing operaions: 1.1 Lombard credi: aucion; a fixed raes 1.2 Purchase of Governmen securiies: REPO; o mauriy 1.3 Forward purchase of foreign exchange (SWAP) 1.4 Inraday credi (overnigh) 2. Aracion of resources: 2.1 Banks' required reserves 2.2 Sale of Governmen securiies: (REPO); o mauriy 2.3 Taking money ino deposis: aucion; a fixed raes 2.4 Issue of securiies of he Naional Bank 3. Purchase and sale of foreign currency (in he segmens of he open foreign exchange marke for regulaion of he foreign exchange rae) 4. Purchase and sale of precious meals and precious sones 5. Purchase and sale of cash (o ensure cash circulaion) 6. Regulaion of marke prices (hrough prices of he Naional Bank operaions) 6.1 refinance rae raes of he Naional Bank operaions 6.2 official exchange rae 6.3 prices for precious meals and precious sones 7. Paricipaion in he auhorized capial 8. Agency operaions: 8.1 operaion of corresponden and oher bank accouns 8.2 hrough accouns of he Treasury of he Minisry of Finance wih he Naional Bank a) ransfer of he Treasury's funds o banks b) ransfer of banks' funds o he Treasury Each operaion of he cenral bank wih Tier 2 banks has he main arge purpose, which o some exen becomes clear from he name of operaion. A he same ime, all operaions in he aggregae have a significan effec on he financial sabiliy of he banking secor, foreign exchange marke, and consolidaed moneary parameers. Therefore, hey mus be forecased and conduced wihin he framework of coordinaed echnology. In he oaliy of he Naional Bank s insrumens, he refinancing operaions and operaions aimed a he aracion of banks' resources fulfill a sor of balancing funcion. They ensure he mainenance of banking secor liquidiy banks' abiliy o mee heir obligaions in due ime a a reasonable level. These operaions are par of he sysem regulaing he moneary sphere and herefore hey are subordinae o he common objecives of he cenral bank of he counry, i.e. proecion and sabiliy of he Belarusian ruble, assurance of paymen sysem funcioning, and he developmen and srenghening of he banking sysem. The mos developing among hem are aucion operaions of refinancing and aucion operaions designed o arac banks' resources. The policy of curren liquidiy regulaion, on he whole, is based on he following underlying principles: argeed orienaion, marke relaions wih banks, securiy, ransparency, efficiency, accessibiliy, and flexibiliy. Refinancing of banks is a form of providing moneary funds on he condiions of collecabiliy and repayabiliy on he par of he Naional Bank. I is one of he funcions of he Naional Bank, he lender of las resor (boh in respec of banks and he majoriy of cenral banks of oher counries). Bu since he refinancing operaions are one of he money issue channels, heir volumes and principles hereof are deermined wihin he framework of he overall moneary program. Purchase and sale of foreign exchange is carried ou by he Naional Bank in all foreign exchange marke segmens, primarily in order o regulae he exchange rae of he Belarusian ruble and smoohen is flucuaions ha are no desirable for he foreign exchange marke. A he same ime, purchase (sale) of foreign exchange causes an increase (a decrease) in he foreign exchange reserves Conference May 19-20, 2008, Minsk

18 18 of he Naional Bank as well as changes in banks' resources in he naional currency, which ough o be aken ino accoun in he sysem of liquidiy regulaion of he Belarusian banking sysem. Purchase and sale of precious meals and precious sones is conduced by he Naional Bank primarily for he purposes of seing up a fund of precious meals and precious sones, as well as of operaional managemen hereof wihin is compeence. Besides, said operaions faciliae he developmen of he precious meals and precious sones marke, which is necessary in order o expand he sphere of he commodiy-money relaions and, accordingly, increase he level of he economy s moneizaion. Imporanly, precious meals and precious sones are purchased more acively for Belarusian rubles which makes i possible o improve he balance of commodiy-money proporions in he domesic consumer marke and hus enhance he sabiliy of he naional currency. Cash operaions are carried ou by he Naional Bank o ensure he funcioning of cash money circulaion in he counry. Such operaions resul in he relevan changes in cash and non-cash money a he cenral bank and banks, which affecs banks' resources and requires ha i be aken ino accoun in he sysem of liquidiy regulaion of he banking sysem. Paricipaion in he building up of banks' auhorized capial is considered an inerim measure of he cenral bank ha is deermined by he need o suppor he resource base of individual banks. A presen, he Naional Bank owns shares of four banks. A he same ime, he downside of is paricipaion in he banking capial is, firs, he issuing characer of such financing and, second, he collision of ineress of he cenral bank as an owner and a supervisory body. Therefore, he sraegic objecive of he Naional Bank is he reducion of is paricipaion in he auhorized capial of he counry's banks. Prices in he money marke are regulaed via wo major channels. Firsly, hrough conducing operaions, on a sysemaic basis and in significan volumes, for paymen charged, depending on he insrumen, in he form of ineres and discoun raes, ariffs, or difference in exchange raes. This deermines he price for he common moneary resources of banks and oher marke paricipans and, accordingly, prices when hey conduc asses operaions hereafer. This channel is used primarily o conduc operaions of banks' liquidiy regulaion, as well as foreign exchange rading operaions, which are significan in volumes and are conduced on a regular basis. Secondly, price arges announced by he Naional Bank (above all, he refinance rae and he official exchange rae of he Belarusian ruble) are, o a grea exen, direcly considered by banks and oher financial marke operaors when forecasing and seing heir prices. Obviously, he significance of he second price channel depends on he sysemaic confirmaion of he acualiy of he cenral bank's arges. Corresponden and oher bank accouns are operaed primarily o ensure uninerruped and secure banks' selemens wih heir cliens and fulfill moneary obligaions o he sae and oher banks. In he Republic of Belarus, he mechanism of effecing inerbank selemens via he single corresponden accoun of a bank opened wih he Naional Bank was inroduced in January Is inroducion made i possible o enhance he effeciveness of he paymen sysem, ensure conrol over banks' corresponden accouns, and regulae bank liquidiy on he basis of sep-by-sep developmen of moneary insrumens. Naional Bank of he Republic of Belarus Operaions conduced when he Naional Bank provides services o he Governmen in differen segmens of he financial marke are also conneced wih he Naional Bank's moneary relaions wih commercial banks. Said operaions ensure selemen and cash servicing of Governmen insiuions; agency services provided o place Governmen securiies; and he servicing of he sae deb. Accordingly, significan moneary funds do no jus move wihin he accouns of he Treasury of he Minisry of Finance opened wih he Naional Bank, bu are also ransferred o banks or, vice-versa, are ransferred by banks o hese accouns. Therefore, he cenral bank is required boh

19 o organize he selemen and paymen process and carry ou he aciviies agreed wih he Minisry of Finance, ha are aimed o sreamline said money flows and regulae banking secor liquidiy wih a view o solving he asks of a single economic policy of he counry. 19 Thus, pracical implemenaion of moneary policy by means of purposeful implemenaion of moneary insrumens is he resul of mulisage and coordinaed echnology of funcioning of he moneary regulaion sysem as par of he overall and developing economic regulaion sysem of Belarus. Moneary Forecasing Mehods Ensuring moneary policy effeciveness implies also he need for he design of scenarios of forecass and decisions made by he cenral bank based on models and mehods ha ake ino consideraion he oaliy of he channels of moneary policy influence on he economy. Basic forecas calculaions of moneary indicaors are based primarily on he sysem of economeric models (SEM MP 2) which includes hree inerconneced blocks: 1) ineres rae channel; 2) exchange rae channel; and 3) he balance of money supply, he economy's demand for money, and prices. SEM includes four main models: consumer price index model; money supply model; model of he Belarusian ruble exchange rae; and ineres rae model. The main inerrelaions of moneary and macroeconomic indicaors of his sysem are shown in figure 3. The sysem of SEM MP-2 is designed o solve he asks of formulaing moneary policy of he Republic of Belarus (MP): 1) analyzing and forecasing moneary indicaors on he basis of scenario calculaions and 2) defining he required level of influence on he par of he MP insrumens and exogenous variables which would make i possible o reach permissible values of inermediae and arge indicaors. The logic of is consrucion reflecs he process of MP formulaion which is based on he descripion of communicaion channels beween he insrumens ha are under he direc conrol of he cenral bank and he final objecives of he counry. There are hree major sages of MP formulaion: 1) seing sraegic (final) objecives, 2) defining inermediae objecives, and 3) choosing moneary insrumens. The echnology of scenario forecasing using his sysem makes i possible o ake ino accoun he complexiy of macroeconomic relaions when choosing moneary insrumens (he ruble money base, he refinance rae, he raio of he required and excess reserves o deposis, and he Belarusian ruble-us dollar official exchange rae). This is refleced in he fac ha, firsly, forecas developmen akes ino consideraion foreign economic rends, and, secondly, he calculaions are coordinaed wih he forecas parameers of he non-financial secor of he economy. Besides, o obain alernaive varians of forecass, he Naional Bank uses he Quarerly Projecion Model (QPM) which is based on he New Keynesian concep (Mironchik, 2006). The model describes inerrelaions beween he main macroeconomic variables: inflaion, GDP in erms of he aggregae demand of he economy, exchange rae, and ineres rae (figure 4). I makes i possible o make forecass for a period when he effec of moneary impulses generaed by he Naional Bank by means of ineres and exchange raes regulaion, on he aggregae demand and inflaion (up o 12 quarers) is mos effecive. The calculaions made as par of said basic models, he esimaion and deailed descripion hereof are supplemened wih he forecass of foreign exchange receips on he basis of he balance of paymens, price indices, he economy's demand for money, households' moneary incomes and expenses, as well as a number of oher economic and moneary indicaors. The calculaions are made using a se of differen mehods, including he equaion of exchange, purchasing power pariy, uncovered ineres rae pariy, equaions of money muliplicaion, VAR, simple regression models, and ohers. Conference May 19-20, 2008, Minsk

20 20 Figure 3: Srucure of he Sysem of SEM MP-2 Exchange rae channel Ineres rae channel RUR/USD cross-rae Inflaion in Russia Ineres raes on newly araced erm Refinance rae BYR/RUR nominal exchange rae BYR/RUR real exchange rae Gap of BYR/RUR real exchange rae Inerbank rae Shor-erm deviaions from longerm inerrelaions of prices and BYR/USD exchange rae BYR/USD nominal exchange rae Inflaion in USA Demand for money Inflaion Gap М2* Money supply Rae on newly graned credis in he naional currency Real GDP Moneary Moneary muliplier Rae on newly graned credis in hard currency Bank prime loan rae in USA Balance of money supply, he economy's demand for money, and prices The significance of influence of moneary mechanism channels on he economic variables is moniored on a regular basis. This makes i possible o idenify moneary policy prioriies and esimae he effeciveness of is regime. For example, modern esimaions on he basis of SEM-MP-2 ha, in principle, coincide wih he resuls of he analysis carried ou using VAR, sugges ha changes in he exchange rae of he Belarusian ruble agains he US dollar deermine he inflaionary processes in Belarus. Naional Bank of he Republic of Belarus This is explained by a significan share of he US dollar in he domesic foreign exchange marke, in he srucure of foreign exchange savings of households, as well as in he foreign rade operaions selemens. Accordingly, he mos effecive channel of moneary policy influence on he domesic and exernal susainabiliy of he Belarusian ruble is he mainenance of sabiliy of he exchange rae of he Be-