A new paper on Monetary Policy Transmission in Georgia: empirical evidence in the Working Paper Series of the National Bank of Georgia

The National Bank of Georgia (NBG) publishes the next paper in its NBG Working Paper Series. The working papers aim to present research on topics relevant to central banks and economics profession. The papers are circulated to elicit comments and encourage debate on ongoing research. The Working Paper Series are coordinated by the Macroeconomic Research Division and focus on topics relevant for central bank policy, including macroeconomic modeling, monetary and exchange rate policies, financial stability, etc.

The next working paper in the series titled "Monetary Policy Transmission in Georgia: empirical evidence", was prepared by Sergo Gadelia (ISET Policy Institute) Tamar Mdivnishvili (NBG) and Shalva Mkhatrishvili (NBG). The aim of this paper is to empirically analyze the strength of monetary policy transmission mechanism in Georgia. Based on structural vector autoregressions and data since 2009 when the NBG switched to an inflation targeting regime, the paper suggests that both interest rate and exchange rate channels are relatively strong. Namely, an increase in interest rates seems to generate all three: smaller output gap, exchange rate appreciation and, consequently, lower inflation, underlining the improved transmission mechanism since the estimates from a decade ago. The reaction of inflation to an interest rate change peaks after 4 quarters, in line with other studies as well as the NBG's communication. Moreover, a variance decomposition analysis shows that inflation is mostly driven by supply shocks with demand shocks having only a negligible effect. In principle, this may be in line with the presumption that it is the central bank's systematic reaction function that neutralizes the effects of demand shocks on inflation, leaving the supply side as the major driver of inflation data.

The working papers can be accessed at the following page.