BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
Bi-currency versus Single-Currency Targeting: Lessons from the Russian Experience
Abstract: This paper examines the impacts of the 2005 shift in
Russian exchange rate policies from single-currency to bi-currency basket
targeting on domestic interest rates and sovereign risk premium dynamics.
The policy shift disconnected domestic interest rates from US
dollar-denominated interest rates, replacing them with a growing positive
relationship with the dual-currency basket (USD-EUR) adopted by the Central
Bank of Russia, as well as a synthetic interest rate composed of the US
dollar LIBOR and the euro LIBOR. The paper also considers the insulating
properties of Russian basket targeting policies during the recent global
liquidity crisis. I present evidence that the Russian MosIBOR rate was
negatively related to the US dollar LIBOR rate and positively related to
the synthetic USD-EUR rate during the "decoupling" stage of the crisis.
Even with the steep quantitative easing of the US Fed during this period,
the finding suggests the Russian money market was more in sync with the
monetary policies of the euro area. The central conclusion here is that, in
conditions of managed floating exchange rate policies and liberalized
capital accounts, the relationship between a country's domestic interest
rates and their foreign counterparts depends on the de facto operating
target of the central bank of this country, whether it is a single currency
or a basket.
Keywords: exchange rate policy; basket targeting; sovereign CDS; decoupling; (follow links to similar papers)
JEL-Codes: F31; F33; (follow links to similar papers)
33 pages, June 15, 2010
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