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Giorgi Bakradze is a Ph.D. student at Georgetown University. At the time of writing, he was in the Macroeconomics and Statistics Department of the National Bank of Georgia. The views expressed in the paper are those of the authors and do not necessarily represent those of the institutions they are or were affiliated with. The authors would like to thank David Amaglobeli, Junko Koeda, Archil Mestvirishvili, Robert Tchaidze, and John Wakeman-Linn for very helpful comments, as well as Naghmeh Djahanyekta for excellent editorial assistance. All remaining errors are the authors’ responsibility.
Dabla-Norris and others (2007) provide a complimentary discussion of some of the issues that we sidestep in this paper.
See the next section for a more thorough discussion.
The rise in international reserves has been attributed to a variety of factors, including increasing confidence in the Georgian banking system, as well as higher demand for domestic currency due to stronger tax enforcement and legalization of the economy; see IMF (2005), NBG (2005), and Billmeier and Fedorov (2006). More recently, the continued capital inflows are related to the successful privatization program of the remaining state-owned enterprises and other foreign direct investment.
For a comparative assessment of issues in the transition to a monetary framework focused on controlling inflation in Armenia and Georgia, see the complementary paper by Dabla-Norris and others (2007).
More precisely, the Main Directions address “the level of inflation, amount of foreign exchange reserves, the maximum amount of loans anticipated to be extended by the National Bank to the government, the mechanisms of monetary regulations to ensure these parameters, exchange rates and foreign currency regimes and proposed actions for improvements in the regulatory framework and the monetary system” (Article 69.2 NBG law).
There exists, however, the possibility that the Georgian Parliament can ask the NBG to change its monetary strategy (Article 28.2 of the NBG law). This has not happened so far.
In May 2006, Article 57 of the NBG law was modified to outlaw financial assistance to state institutions— contradicting the provision in Article 69.2 on the maximum amount of loans to the government to be spelled out in the NBG’s Main Directions; see footnote 8.
We understand transparency in this context as transparency ex post and not related to the concept of central bank “predictability,” a discussion that has arisen in the context of Taylor rules.
This section draws on Dabla-Norris and Floerkemeier (2006), who present a more thorough discussion of the various channels in the Armenian context.
This is inline with other countries in the Caucasus and the CIS more generally except Kazakhstan, but substantially lower than in more advanced transition economies, see Billmeier and Ding (2006).
All variables are in logs.
We experimented with the inclusion of data from the earlier period (1996–98) to gain a few observations, but the volatility introduced by the weak data and economic turmoil did not improve our results, notwithstanding the potential gain in estimate precision.
Results using seasonally adjusted series were broadly similar. Some impulse responses were somewhat smaller and less significant.
While broader monetary aggregates are usually more tightly related to price developments, they also incorporate effects that are not driven by policy decisions, for example changes in velocity. The choice of currency in circulation is also driven by the fact that certain components of broader monetary aggregates are highly volatile and not under the direct control of the NBG.
In the next section, we provide some rudimentary evidence on the interest rate channel.
Traditional unit root tests may have little power to distinguish between unit roots and stationary series in short samples, see the discussion in Dabla-Norris and Floerkemeier (2006).
Currency in circulation Granger-causes the price level if the real effective exchange rate is included instead of the nominal.
The liquidity effect is clearly visible if other monetary aggregates (e.g., reserve money) are used instead of currency in circulation.
See the Appendix for a full set of impulse responses.
That is, if a monthly observation for the 7-day rate is missing, we assume that it changed in the same direction and by the same amount as the 30-day rate and vice versa.
Credit aggregates were deflated with the GDP deflator. The results are qualitatively robust to ordering the credit aggregate after currency in circulation.
One major exception in this context is the multiplicity of goals that the NBG is by law required to strive for.