The Design of Monetary Policy in a Small Transitional Economy: The Case of Tajikistan

Using the Structural Vector Autoregression (SVAR) method this paper surveys the effect of monetary and exchange rate policies on Tajikistan’s economy for the period 1996 to 2004. A number of restrictions are imposed and the contemporaneous and long-run restrictions model are used to identify the dynamic response of inflation and output to the monetary and exchange rate innovations. As a result these shocks are used to generate the structural impulse response and forecast error variance decomposition functions for assessing the dynamic impacts of monetary and exchange rate policies on country’s real sector variables.