The Credibility of CIS Exchange Rate Policies: A Technical Trader's View

Abstract

Stabilizing the exchange rate is a major monetary policy goal in a number of CIS countries. We present a microstructure model of the foreign exchange market based on technical trading that allows us to categorize the de facto exchange rate regimes and derive a market based measure of the credibility of these exchange rate regimes. In our empirical analysis we compare the exchange rate policies of Belarus, Kazakhstan, Russia and Ukraine with the benchmark of three potential candidates for an EU accession, namely Bulgaria, Romania and Turkey. Our results indicate that markets assign a relatively high degree of credibility to the exchange rate management of the CIS countries. The paths to credibility, however, were quite different. Stabilizing the exchange rate is a major monetary policy goal in a number of CIS countries. We present a microstructure model of the foreign exchange market based on technical trading that allows us to categorize the de facto exchange rate regimes and derive a market based measure of the credibility of these exchange rate regimes. In our empirical analysis we compare the exchange rate policies of Belarus, Kazakhstan, Russia and Ukraine with the benchmark of three potential candidates for an EU accession, namely Bulgaria, Romania and Turkey. Our results indicate that markets assign a relatively high degree of credibility to the exchange rate management of the CIS countries. The paths to credibility, however, were quite different.