Orthodox Money-Based Stabilization (Ombs) Versus Heterodox Exchange Rate-Based Stabilization (Herbs) : The Case of Russia, the Ukraine and Kazakhstan

The paper analyses the macroeconomic stabilization process in Russia, the Ukraine and Kasakhstan (CIS-3). It starts with a classification of different stabilization approaches that were adopted in the last 20 years. It shows that the Fund programs that were suggested for the CIS-3 for 1995 can be classified as an orthodox money-based stabilization (OMBS). We discuss whether the conditions for implementation of such a policy were given in early 1995 or whether it would have been advisable to choose the alternative of a heterodox exchange rate-based stabilization (HERBS). The experience with both strategies shows that HERBS are superior in terms of transparency and credibility, a fact that is confirmed empirically by the dismal average output performance of OMBS. In the case of the CIS-3 one can show that the stabilization success in 1995 was accompanied by a strong overshooting of the monetary targets. Instead, the Russian authorities followed a concept which comes very close to HERBS. In the Ukraine and Kasakhstan the exchange rate has also been an important parameter for monetary policy, but the underlying framework is less clear. At best it has some parallels to the concept of inflation targeting