Monetary Policy in Hybrid Regimes: The Case of Kazakhstan

Abstract

This paper analyzes the monetary policy framework in Kazakhstan. The authorities have been successful in containing inflation in the context of a managed exchange rate regime. Over the past two years, the central bank has taken steps to enhance its ability to regulate liquidity in the financial system. However, the current policy interest rate does not properly signal the stance of policy, reflected in a weak transmission from the policy rate to money market interest rates. With the use of a stylized model, the paper studies the macro determinants of money market interest rates under the current framework, and illustrates both the benefits and challenges of active interest rate policy. The model shows that limited use of instruments to steer short-term interest rates weakens the framework’s ability to counteract shocks. Finally, the paper explores the implications of varying degrees of exchange rate flexibility for interest rate policy and open market operations.

Keywords: Monetary policy, Kazakhstan, Exchange rate regimes, Interest rates, Money markets, External shocks, Devaluation, Econometric models, Interest Rate, Money Market, Exchange Rate., exchange rate, central bank, inflation, open market operations, money market interest rates, aggregate demand, exchange rate management, money demand, monetary fund, money balances, exchange rate flexibility, real exchange rate, monetary conditions, national bank, foreign exchange, exchange rate fluctuations, exchange rate channel, market exchange rate, exchange rate adjustments, exchange rates, flexible exchange rate, exchange rate level, demand for money, exchange rate guides, exchange rate devaluations, nominal ex

JEL Classification: E42, E43, E47, E52, E58