Study the relation between monetary and exchange rate policy: The case of Belarus

A simplified structural model of Belarusian economy is employed to study the relation between monetary and exchange rate policy in Belarus. It is confirmed that in the long run monetary policy and exchange rate policy can not be used independently. In the short-run monetary and exchange rate policy provides the National Bank of Belarus with 2 independent tools to respond to shocks. The Bank can compensate over-one-year-long transitory shocks via monetary policy adjustment and foreign exchange interventions. The Bank can not compensate and rather needs to adjust to permanent shocks: monetary policy adjustment ensures stable inflation, exchange rate adjustment is more appropriate for output stabilization. Foreign exchange interventions allow for smoother policy response and smoother economic adjustment.