Abstract:
Shift to floating exchange rate regime is controversial decision to commodity
oriented economy of Kazakhstan. Increase in volatility of nominal exchange rate
is believed to bring deterioration of main macroeconomic variables and reduction
of welfare. This paper thus aims to define optimal monetary policy in estimated
small open economy of Kazakhstan. On a foundation of Taylor rule and under two
specifications of the model it is found that currently National Bank of Kazakhstan
reacts to movements in exchange rate on a limited extent. In addition, optimal
policy simulation based on posterior distribution of model parameters and welfare
loss minimization function is performed. This analysis shows that exchange rate
stabilization within 5% band delivers lowest welfare loss.