The role of the refinancing rate in exchange rate regulation

Abstract

In the last years instability of national currency has been one of the biggest problem of Georgia. This fact has significant negative impact on other economic variables and on social expectations as well. Despite the fact that National Bank of Georgia tries to balance the currency level by making interventions, this attempts do not have desirable results, since interventions are the way to control exchange rate in short-term period, rather than to have real influence on real causes.

The purpose of the present paper is to determine what is the relationship between the refinancing rate and the exchange rate on the basis of observations, correlation analysis of current factors and decisions of the National Bank and whether it is possible to include more refinancing rates in exchange rate regulation or not. Based on the results of the study, it was ascertained that the refinancing rate occupies an important place among the factors affecting the GEL exchange rate.

The analyze showed that the refinancing rate can be used by the National Bank not only when the pressure of currency depreciation shifts to inflation, but also when exchange rate fluctuations reach a certain level.