Inflationary Effects of Excessive Stimulation of Domestic Demand in Belarus

The analytical note assesses the potential consequences of excessive stimulation of domestic demand on the macroeconomic indicators of Belarus under different approaches to monetary and exchange rate policies. The quarterly projection model (QPM) for the Belarusian economy (Kharitonchik, 2023) is used for the assessment. The results show that increasing GDP by 1% above its potential level over two years, while maintaining the current approach to monetary policy as of June 2023, will lead to an additional increase in consumer prices by 5.8%. When applying "implicit" inflation targeting with FX interventions to smooth exchange rate fluctuations and partially restricted cross-border capital flows, the cost in terms of price increases may be reduced to 2%.