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Journal number 3 ∘ Givi Lemonjava

Expanded Symmary

The power and rapidity of the monetary politics influence to the economics are depending on numerous of factors. Among those the most important things are the extent   of financial sector development and dollarization level. Besides the banking sector in Georgia financial sector, its all the rest components, are faintly developed. Especially the capital market development  level is very low. Its influence to the capital and cash flows is almost identically zero. In addition, because high level of dollarization , it is too weak the money markt instruments development scale. The monetary policy  has to function in a such environment, which  results depend upon the efficiency of the transmission mechanisms of monetary policy. The aim of this paper  is to check the  hypothesis of monetary policies transmission  mechanisms influence of price inflation.

The Committee of Georgia National Monetary Policy establishes the short term rate of refund of the banks. With indirect and direct mechanisms, this rate influences on rates of the market interest rate, monetary aggregates level, assets price, expectations and also exchange rate. In conclusion, the result should be the achievement of the desirable rate of economical growth with low  inflationrate.

On the basis of the existing data,  in this  article, we have studied the current  environment of  the financial sector of Georgia, where the monetary policy has to act.  According to this purpose, we have estimated the influences of monetary policy official interest rate  on the interest rates of the money market  instruments and also on LARI to USD  exchange rates. Using statistics methods it was evaluated the refund rate influence on the money market of short term instruments. The coefficient of the correlation between the M2  growth and the Monetary Policy Interest Rate(MPIR)  is accelerated according to the delayed months and reaches at  the eleventh month.

The short term money instruments are densely correlated to MPIR. But the correlation of the banks loans interest rates is too weak to the MPIR. Only the Lari’s loans interest rates (ALR) show large influences from MPIR.  Their regression equation is  

 ALRt = 13,05+0,78XMPIRt-6

which determination coefficient equals 38. 

The changes of MPIR  may effect on the national currency exchange. Though, this influence is not always clear , it depends on the   local and foreign relative interest rates, how it is attractive and available the market of local money instruments for foreign investors. Also the expectations greatly influence on this effect, which are fed from  the monetary policy  current decisions  and the expectations related to the inflation. Moreover, it should be considered the speculative pressure on the rate of the exchange, where the  central bank’s intervention policy strengthens the speculative intensity. 

There is discussed only the MPIR influence on the currency exchange rate in the article. It was almost  zero the refund rate influence at the currency within 3 months period. Generally, the monetary market of Georgia weakly responds to the changes of the monetary policy  rate, rather  Lari exchange rate  has no   react to its change. The only reason of this is that the  perception of currency risk is high among  the investors and they refrain from investing of financial assets of Lari; and another reason is - the low level of financial market development in Georgia, which delays the proces of cash flow. In general, the efficiency of the changes of MPIR  strongly depends on the level of financial market development in the country.

As it was expected, the  regression

                                                                TLt = 33,52 - 131ALRt

 of the total Laris loans(TL) with the relevant interest rates is important.               

In this  chain of the dependents, one important relationship shows following regression  

   M2t =  815851,77 + 0,33XTLt  ,

which estimates total loan influences of monetary aggregate, M2. This equation of regression gives an explanation  of  88 percentage level and satisfies all the criteria of essence.

Along the monetary policy transmission chain cumulative effect of the MPIR is  

                        CE = 0,14X0,38X0,73X0,88 = 0,0341              

or 3.41 percente . Such weakness of this influence is because of narrow extent of National Bank refunding transaction. So, the interest rate of the refund isn't so hard  arousing, that it should be possible to manufacture the effect monetary politics on its basis.

The Georgian National Bank has declared the focused monetary policy on the purposed level inflation – targeted inflation policy, where, as a rule, the MPIR  role should be much more influential. But as we had seen above, a real influence of this mechanism is very weak and would not be considered as reliable mechanism of inflation control.

Though, it should be mentioned, that nowadays many countries give us quite successful examples of monetary politics focused on one purpose of this type [Mishkin, F. 2009]. They managed to establish a reliable control over the inflation with such monetary policy instruments, reach and preserve approximately a sustained low inflation.

In case of Georgia, the weakness of the influence of the MPIR changes within the mechanisms of politics transferring  is conditioned by some  factors. Among them the one is that the capacity of Lari transactions in tha money market is little, which is mainly caused the higher level of dollarization ; the second, - the structure of money market and a little scale of money instruments in  trading; the third, - a low level of integration with the global money markets, resulting that the change of Lari interest rate can't afford to influence over the foreign currency flows; the fourth, - a high level of deposits and loans dollarization.

The fact that the changes of Lari interest rate can't influence on the inflowing of foreign currency, it complicates the task of monetary politics in the affair of stability of currency exchange. Otherwise, for Georgia which is developing economic country, is rather critical the stability of currency exchange. Thus, the monetary policy should not be indifferent towards the aim of the exchange course, because the Lari exchange course is an important factor of price inflation. Moreover, a long term instability of Lari course can make a basement of financial crisis.  Despite of above mentioned declaration, Georgia National Bank monetary policy could not ignore currency exchange rate stability goal. It should take care and find method to pursue both targets at the same time.