THE EFFECTIVENESS OF INFLATION TARGETING IN GEORGIA
Abstract
Monetary policy as the very important macroeconomic regulator has been identified as the subject of intense research over years. Particularly, it was extensively studied for industrialized countries. However, as transition countries still are not able to implement strong and stable monetary policy, the issue at hand has become the focus of academic research only in recent years. Thus, we find very interesting to analyze the monetary policy in developing countries on an example of Georgia.
Firstly, in case of Georgia the data availability gives us the possibility to make complete analyses. Secondly, country itself presents interesting case as it has recently experienced important economic transformation since Rose Revolution in 2003, followed by financial crisis and Russian-Georgian War in 2008. So, the above-mentioned sequence of quite influential events outlines the challenging role of National Bank of Georgia to keep mac- roeconomic stability in the country. Probably this might be the reason of switching from monetary base to inflation targeting (IT) regime in 2009. Thus we find interesting to elaborate consequences of this crucial change in the strategy of the monetary policy since 2009. Howeverthe effectiveness of Georgian monetary policy, after switching to inflation targeting regime, has not been systematically studied until now.Recent research papers in- stead provide findings for 2002-2007, trying to identify the main channel of monetary transmission mechanism in Georgia. Based on the literature we can just state that the strongest channel of the monetary transmission mechanism in Georgia is the exchange rate pass through(Gigineishvili, 2002; Samkharadze, 2008; Bakradze, 2008; Barbakadze, 2008). Thus, in order to compare implications of monetary policy implementation in the time period before and after changing the targeting regime we study the effects of exchange rate shocks on inflation in the pre and post inflation targeting regime by raising the following research hypothesis: Inflation targeting regime has reduced exchange pass through. THEORETICAL BACKGROUND
