Current monetary policy regime

Since 2015 the National Bank of the Republic of Belarus has been implementing monetary policy in the monetary targeting regime. The transition to the new regime was caused by the need to improve the efficiency of monetary policy and the controllability of inflationary processes by the National Bank of the Republic of Belarus.

The key characteristics of the current monetary regime of the National Bank of the Republic of Belarus are the following:

  • fixing price stability as the main objective of monetary policy;
  • annual establishment of the quantitative value of the inflation target to achieve the main objective in the medium term;
  • use of broad money supply as an intermediate target for achieving the inflation target;
  • quantitative value of the intermediate target is established as corresponding to the achievement of the inflation target, taking into account the forecasted change in equilibrium GDP and the velocity of money circulation;
  • management of the overnight interbank market interest rate (until January 2018 - a ruble monetary base) to control the intermediate goal;
  • implementation of the exchange rate policy in the managed floating rate regime; and
  • open information policy of the National Bank, which provides for informing the general public about the monetary policy.

The choice of monetary targeting as a monetary policy regime in the Republic of Belarus is justified by a number of practical considerations:

  • the broad money supply demonstrates a sustainable relationship with the inflation dynamics, which ensures that the National Bank of the Republic of Belarus exercises control over the primary monetary policy objective by managing an intermediate target;
  • a stable function of demand for money, which allows the National Bank to forecast the dynamics of broad money supply and its aggregates, is available;
  • there is a strong cause-and-effect relation between the operational target and broad money supply, which makes it possible to achieve an intermediate goal through the operational one;
  • the National Bank of the Republic of Belarus using monetary policy instruments is able to ensure the implementation of the operational target; and
  • see the works of Mironchik and Bezborodova (2015), Pelipas and Kirchner (2015a, 2015b) for receiving additional information on justifying the choice of the monetary policy regime in the Republic of Belarus.

Since January 2018, the National Bank switched to the use of the interest rate on overnight interbank credits in the national currency as the monetary policy operational objective. This transition is one of the steps to implement the inflation targeting regime in the medium term and is designed to increase the efficiency and transparency of the monetary policy. Using a short-term interest rate in the interbank market as an operational target, in contrast to a monetary base, reduces the volatility of financial market interest rates, which makes it possible to give a clearer signal to market participants about the monetary policy direction.

In fact, using the interest rate as the monetary policy operational target means that the National Bank of the Republic of Belarus, in order to implement the intermediate objective, carries out the management of the price of money in the economy. The price of money is one of the main factors of demand for it, which determines the National Bank’s ability to influence the dynamics of the broad money supply by changing the financial market interest rates.


The theoretical basis of monetary targeting is the quantitative theory of money, and the central banks in the decision-making in the field of monetary policy are guided by the rule of Friedman, according to which the increase in money supply should be equal to the sum of the inflation target, the growth rates of equilibrium GDP and the change in the equilibrium velocity of money circulation:

∆MT ≈ πT + ∆Yeq - ∆Veq,

∆MT – target for money supply growth;
πT – inflation goal;
∆Yeq – increase in equilibrium GDP; and
∆Veq – change in the equilibrium velocity of money circulation.

The use of equilibrium rates of change in GDP and the velocity of money circulation is due to the stabilizing role of monetary policy, which consists in fulfilling the declared inflation objective and smoothing out fluctuations of economic activities.

The excess of the growth rates of GDP and the velocity of money circulation over their equilibrium rates will lead to the excess of the demand for money over the established intermediate target, as well as the formation of inflationary pressure in the economy. Under such conditions, the central bank’s control over the implementation of an intermediate target for the growth of the money supply will result in the formation of such a situation in the money market, in which the demand for money will exceed the supply thereof. The balancing of the money market will occur after an increase in the money price – a growth in interest rates in the economy. The increase in interest rates will cause a slowdown in demand in the economy, which will be reflected in the slowdown of economic activity, the velocity of money circulation and, with a certain time lag, in neutralization of the inflationary pressure.

Equilibrium GDP and equilibrium velocity of money circulation represent the volume of GDP and the level of circulation velocity that would have developed in the economy in the current period of time at flexible prices (the absence of nominal rigidities in the economy). Monetary policy does not have a direct impact on the equilibrium GDP and the velocity of circulation, which are determined by structural factors (the level of development of technologies and institutions, demographic trends, the education system, etc.).

If the actual GDP corresponds to the equilibrium one, the production level does not put upward or downward pressure on inflation (the actual level of inflation complies with the inflation expectations of economic agents). If the actual GDP goes beyond the equilibrium one, the use of production factors by firms is at a level that exceeds their normal (most effective) level of use. This means that firms are forced to attract additional labour or capital (for example, machinery or other equipment) or increase the working time of existing employees and capital in order to produce an additional unit of the output. This requires an increase in labour costs and maintenance of the capital. As a result, as production factors are used beyond their efficient level, marginal costs of firms begin exceeding their marginal revenue. Under the conditions of excess demand, firms can increase prices for products to maintain the rate of profit unchanged, or even try to raise it. This leads to the growth of inflationary pressure in the economy. If the equilibrium level of GDP exceeds the actual one, the opposite is true.

,p>For additional information on the equilibrium and cyclic components of economic variables, see the works of Demidenko (2008), Demidenko and Kuznetsov (2012).

Demand for money is understood as the need of economic entities in money, resulting from the functions they perform. Behavioral characteristics of economic agents at the micro level form the resultant vector of demand for money at the macro level, which can be represented as a function of a certain monetary aggregate from the variable of transactions’ scale in the economy and the return on assets that are alternative to the monetary aggregate in question.

More details can be found in the works of Pelipas and Kirchner (2015a, 2015b), Bezborodova (2014a, 2014b).