Drivers of Inflation in the Caucasus and Central Asia

IMF Working Papers, January 10, 2025

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Authors: Maria Atamanchuk, Alejandro Hajdenberg, Dalia Kadissi, Giulio Lisi, Nasir H Rao
Published: January 10, 2025
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400296031.001

Inflation in the Central Asia and Caucasus (CCA) has exhibited large swings in recent years, broadly in parallel with global developments.
External factors play a major role in determining CCA inflation dynamics, although domestic factors (for example, demand conditions and expectations) also contribute.
Monetary policy has a statistically significant effect on inflation, including by moderating the impact of external drivers.
Findings point to the need to:
- continue strengthening policy frameworks to steer expectations and improve the effectiveness of monetary policy;
- establish adequate social safety nets to cushion the impact from global shocks.

The analysis is based on three empirical approaches:
- estimation of a Phillips curve augmented with foreign factors;
- a panel vector autoregression (panel VAR);
- a local projection model to assess the role of monetary policy in steering inflation outcomes.

Strengthen policy frameworks to better anchor expectations.
Improve the effectiveness of monetary policy to moderate external shocks' pass-through to inflation.
Establish adequate social safety nets to protect vulnerable populations from the impact of global shocks.

Subject: Food prices, Foreign exchange, Inflation, Nominal effective exchange rate, Oil prices, Output gap, Prices, Production
Keywords: Caucasus and Central Asia, CCA inflation dynamics, Central Asia and the Caucasus, Food prices, Global, Inflation, inflation development, inflation driver, inflation outcome, local projection method, monetary policy, Nominal effective exchange rate, Oil prices, Output gap, panel VAR, Phillips curve, Phillips Curve estimation