Modalities of Moving to Inflation Targeting in Armenia and Georgia

IMF Working Papers, June 1, 2007

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This paper reviews the current monetary and exchange rate policy frameworks in Armenia and Georgia, and the challenges associated with the choice of a credible nominal anchor in the context of large nominal and real shocks.
The paper makes a case for a gradual transition to full-fledged inflation targeting (FFIT) in both countries in the medium term.
The implications of this option are examined from various angles, including monetary transmission mechanisms and compliance with major institutional prerequisites for successful FFIT adoption.
Based on this analysis, the paper identifies a series of short- and medium-term recommendations, drawing on the experience of emerging market countries that successfully moved to FFIT.

Reviews of monetary and exchange rate policy frameworks in Armenia and Georgia highlight challenges posed by large nominal and real shocks.
Monetary transmission mechanisms are analyzed for their effectiveness under a move toward FFIT.
Compliance with major institutional prerequisites for successful FFIT adoption is assessed.
The case is made for a gradual transition to FFIT in the medium term for both countries.

The paper identifies a series of short- and medium-term recommendations, drawing on the experience of emerging market countries that successfully moved to FFIT.
Recommendations focus on preparing institutional prerequisites and strengthening monetary transmission mechanisms to support a credible nominal anchor under FFIT.

Subject: Banking, Consumer price indexes, Exchange rate pass-through, Exchange rates, Inflation
Keywords: Armenia, central bank, country, exchange rate, Georgia, WP