Исследовательский Центр ИПМ
Kasrtyčnicki Ekanamičny Forum

WP/12/06 Search for the Optimal Monetary Policy in Belarus: The Results of a Simple DSGE Model

This paper employs the simple New Keynesian DSGE model and compares three possible monetary policy variants in Belarus based on inflation targeting. Most of the model parameters are determined on the basis of statistical data of the Belarusian economy. The analysis shows that strict inflation targeting proves to be the most effective among the variants considered. Under this variant, the changes in inflation, output gap and other economic variables after shocks are the least, and households welfare losses function reaches the lowest value. Another result is that larger values of the parameters of the central bank response function to target variables of monetary policy lead to smaller welfare losses in this model. However, this pattern may not be met in a real economy, as economic agents may not possess all the information necessary to interpret actions of a central bank adequately. Accordingly, it is concluded that it is advisable for a central bank to use the monetary policy variant based on strict inflation targeting with a moderately high inflation coefficient. Moreover, this variant may be seen as more effective compared to flexible inflation targeting both according to the formal criteria and because of the unobservability of the output gap, which can lead to welfare losses due to measurement errors.