Departmental Papers

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Tigran Poghosyan, Klakow Akepanidtaworn, Maria Atamanchuk, Ezequiel Cabezon, Selim Cakir, Vahid Khatami, Filiz D Unsal, Mariarosaria Comunale, Marina Conesa Martinez, and Omer Faruk Akbal. Strengthening Monetary Policy Frameworks in the Caucasus and Central Asia, (USA: International Monetary Fund, 2023) accessed December 8, 2024

Disclaimer: The views expressed herein are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Amidst a global backdrop of persistent post-COVID inflation and spillovers from Russia’s war in Ukraine, the countries of the Caucasus and Central Asia (CCA) region have faced strong price pressures in recent years. Inflation is estimated to have peaked in early 2023, but still exceeds central bank targets. In particular, core inflation remains stubbornly high reflecting a combination of second-round effects, surges in global energy and food prices, and domestic demand pressures. More broadly, uncertainty and downside risks also weigh on the economic outlook, including due to regional tensions, financial turmoil related to international monetary policy normalization, and a growth slowdown in key trading partners. In this context, CCA countries’ ability to contain inflationary pressures and anchor inflation expectations hinges on the credibility and effectiveness of their monetary policy frameworks. Since gaining independence in the 1990s, countries in the CCA region have made considerable progress in modernizing their monetary policy frameworks. CCA central banks have strengthened their legal frameworks and established broad de-jure independence. Armenia, Georgia, Kazakhstan, the Kyrgyz Republic, and Uzbekistan are transitioning to inflation targeting regimes, while the central banks of Azerbaijan, Tajikistan, and Turkmenistan rely on the exchange rate as an operational target. However, the post-COVID surge in inflation has highlighted the limitations of current frameworks and triggered a fresh policy debate on the need to strengthen monetary policy effectiveness in the CCA. This paper reviews the CCA region’s monetary policy landscape, highlights challenges in monetary policy design and implementation, and identifies areas that warrant strengthening. It draws on original surveys of country authorities, IMF country teams, and the work by Unsal and others (2022). It uses novel empirical work to analyze monetary policy transmission, the link between foreign exchange interventions and exchange rate dynamics, the drivers of financial de-dollarization, and the effects of central bank communication in the CCA.

Subject: Foreign exchange, International organization, Monetary policy, Political economy, Prices

Keywords: Caucasus and Central Asia, CCA central banks, CCA country, CCA economy, CCA region's monetary policy landscape, Central Asia and the Caucasus, Central Bank Communication and Transparency, Central Bank Credibility, Dollarization, Exchange rate arrangements, Exchange Rate Management, Exchange rates, Inflation, Inflation targeting, Middle East and Central Asia, Monetary policy effectiveness, Monetary policy frameworks, Monetary policy transmission, Monetary Policy Transmission Mechanism

Publication Details

  • Pages:

    56

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Departmental Paper No 2023/006

  • Stock No:

    SMPFEA

  • ISBN:

    9798400240447

  • ISSN:

    2616-5333