Inflation and the Monetary Transmission Mechanism in Belarus, 1996-2001
International Research Journal of Finance and Economics, No. 1, pp. 1-20, 2006
20 Pages Posted: 19 Apr 2011
Date Written: January 1, 2006
The purpose of this paper is to determine the main causes of the Belarus high inflation during the period 1996-2001. Using a co-integration framework, we arrived at an over-identified long-run structure, suggesting that money is co-integrated with wages, but not with prices. We also estimated two independent common stochastic trends: one that is due to shocks in wages, and the other that is due to shocks in exchange rate. We may conclude that exchange rate and wages are empirically important variables explaining the dynamics of prices in Belarus, with money playing an accommodating role. These results could be explained by the presence of the soft budget constraint where money passively adapted to changes in wages and exchange rate. They are also consistent with shocks-and accommodation view of the inflation process. These findings, consistent with some recent studies of inflation in transition economies, imply that exchange rate and wage policies, in addition to the monetary restraint, may be important in designing and implementing a disinflation strategy in Belarus.
Keywords: Inflation, Cointegration, Belarus, Prices, Exchange Rate
JEL Classification: E0, E3, E31, C32, C5, E65
Suggested Citation: Suggested Citation