ABSTRACT:
The research paper shows how exchange rate and stability in financial markets can revive economy, entrepreneurship. Azerbaijan used to have a fixed exchange rate policy and Azeri manat was pegged to US dollar. During low oil returns, The Central Bank of Azerbaijan (CBAR) tried to ensure financial stability and started to use reserves as it did in 2008.In 2008 low prices for oil lasted for 6 months but starting from 2014 low oil prices continues for almost 4 years. This study also identifies fundamental and temporary factors which determine the exchange rates, also evaluates how and in which ways state regulate the exchange rates. As an exchange rate of Azerbaijan mostly depends on oil prices the drop in oil prices caused devaluation in the country. The research paper will identify and discuss monetary policies that state used to respond the devaluation and to see how these policies were successful. The final part of the research evaluates the transferring to floating exchange rate and reveals the currents situation in the market. The transferring process is not over and CBAR has a lot of problems to solve till 2020. Although CBAR tried to establish free-floating exchange system, the economy was not ready for such sharp changes.

Key words: Exchange rate of manat, Financial system in Azerbaijan, Exchange rate regulation, Devaluation, Low oil prices.

Jel classification: E43, G12