Strengthening Monetary Policy Frameworks in the Caucasus and Central Asia
Departmental Papers, August 28, 2023
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Bibliographic details
- Authors: Tigran Poghosyan, Klakow Akepanidtaworn, Maria Atamanchuk, Ezequiel Cabezon, Selim Cakir, Vahid Khatami, Filiz D Unsal, Mariarosaria Comunale, . Marina Conesa Martinez, Omer Faruk Akbal
- Published: August 28, 2023
- Series: Departmental Papers
- DOI: https://doi.org/10.5089/9798400240447.087
Summary
- Context: Post-COVID inflation and spillovers from Russia’s war in Ukraine produced strong price pressures in the Caucasus and Central Asia (CCA) region.
- Inflation dynamics:
- Inflation is estimated to have peaked in early 2023, but still exceeds central bank targets.
- Core inflation remains stubbornly high due to second-round effects, surges in global energy and food prices, and domestic demand pressures.
- Risks to outlook:
- Uncertainty and downside risks include regional tensions, financial turmoil related to international monetary policy normalization, and a growth slowdown in key trading partners.
- Policy implication: The ability to contain inflationary pressures and anchor inflation expectations hinges on the credibility and effectiveness of monetary policy frameworks.
Monetary policy landscape and recent developments
- Institutional progress since independence in the 1990s:
- CCA central banks have strengthened legal frameworks and established broad de-jure independence.
- Operational regimes:
- Armenia, Georgia, Kazakhstan, the Kyrgyz Republic, and Uzbekistan are transitioning to inflation targeting regimes.
- Azerbaijan, Tajikistan, and Turkmenistan rely on the exchange rate as an operational target.
- Recent challenge:
- The post-COVID surge in inflation exposed limitations of current frameworks and triggered renewed debate on strengthening monetary policy effectiveness in the CCA.
Analytical approach and empirical work
- Evidence base:
- Draws on original surveys of country authorities and IMF country teams, and the work by Unsal and others (2022).
- Novel empirical analyses include:
- Monetary policy transmission in the CCA.
- The link between foreign exchange interventions and exchange rate dynamics.
- Drivers of financial de-dollarization.
- Effects of central bank communication in the CCA.
Key findings and areas warranting strengthening
- Findings (high-level):
- Modernization progress has been significant but uneven across the region.
- Operational frameworks and communication practices need reinforcement to improve credibility and inflation-anchoring.
- Areas identified for strengthening (summary of thematic priorities):
- Monetary policy design and implementation.
- Foreign exchange intervention frameworks and transparency.
- Strategies to advance financial de-dollarization.
- Central bank communication and tools to manage expectations.
Policy recommendations (summary)
- Reinforce monetary policy credibility and effectiveness to anchor expectations and contain inflation.
- Advance transitions to operational inflation-targeting where appropriate, while ensuring supporting institutional and market infrastructure.
- Clarify and enhance frameworks governing foreign exchange interventions and exchange rate management.
- Implement measures to reduce dollarization grounded in empirical drivers identified for the region.
- Improve central bank communication practices to strengthen transparency and public understanding of policy reactions.