Bernanke (2024) provides a stimulus for central banks worldwide to rethink their approach to monetary policy-making. In this paper we present an analytical framework which is designed to guide this re-evaluation. We agree with Bernanke that central banks need to adopt a scenario-based approach to monetary policy. And we also agree that there is the need for policy-makers to make clear how their policy is likely to respond to whatever scenario is being considered within the policy discussion. But—in addition—we emphasize the need to build a strategy to maintain credibility of monetary policy. In particular, we present the Forecasting and Policy Analysis System (FPAS), a scenario-based approach which has been adopted by the central banks of Armenia and Georgia. We show how using such a system can help policy-makers avoid ‘dark corners’—conditions where inflation destabilizes monetary goals. This FPAS system integrates Alan Greenspan's principles of risk management with a transparent and accountable structure. 

In this paper we are introducing a DSGE model for Georgia, emphasizing aspects particularly relevant to EMEs: dominant currency invoicing, forward premium puzzle, breakdown of Ricardian equivalence, impaired expenditure switching mechanism, decoupled domestic and imported price levels impacting real exchange rate trend, other non-stationarities, etc. Additionally, we distinguish between global financial centers and other trade partner economies. This LEGO model with these building blocks is planned to be expanded further with other properties in the future to make the model suitable for analyzing FX interventions and macroprudential policies, in addition to monetary and fiscal policies. The model is intended to become the workhorse macro-financial policy model for Georgia, representing a key addition to the NBG’s existing FPAS.

This presentation discusses how money creation works, which is mostly through commercial bank lending as well as government's deficit spending. On a mechanical level, central banks, operating in an interest rate targeting framework, only play a passive role here and at the end of the money creation process. Where their active role is then needed, even for central banks focused on broad money aggregates, is in using interest rate instrument(s) sufficiently aggressively to achieve their objectives. This is so because it is interest rates that influence people's and businesses' willingness to borrow and, hence, start the money creation process. I also discuss many misconceptions that erroneous theory of money multiplier has generated. This misconceptions can lead to serious policy errors.

At the National Bank of Ukraine seminar I talked about the importance of integrating several policy instruments at the disposal of a central bank to achieve price and financial stability. This seems especially important when a country's financial system is significantly dollarized. Indeed, countries with higher dollarization have been relying on macroprudential instruments more, as dollarization has aggravated trade-offs they face, including on an inflation front. National Bank of Georgia has been among those central banks that tackled high inflation through aiding monetary policy rate with other instruments.

In this SUERF article Wim Boonstra and I underline several areas of Central Bank Digital Currencies (CBDC) that apparently need more research. Among these topics are interlinking CBDC's benefits, costs and design choices in a systematic way as well as understanding the impact of CBDC on financial intermediation. The latter implies better understanding of how private money creation works. We hope this article spurs more research on the facets of CBDC outlined here.

This paper proposes an alternative view for the dominant currency paradigm. More specifically, a role of financial dollarization in exchange rate pass-through is analyzed. In highly dollarized countries, where domestic producers are unhedged, exchange rate depreciations against a dominant currency create additional pressures on inflation. In particular, depreciation increases unhedged borrowers’ debt-service costs, which then push overall prices up. We use a panel of countries with highly dollarized economies to empirically estimate the impact of dominant currency exchange rates on inflation. On the theoretical front, we demonstrate this channel by a simple dynamic stochastic general equilibrium (DSGE) model to show how liability dollarization of domestic producers may change the optimal monetary policy reaction to USD exchange rate movements for countries that may not even trade much with the US but have high financial dollarization. 

There has been an increased acceptance of non-linear linkages being the major driver of the most pronounced phases of business and financial cycles. However, modelling these non-linear phenomena has been a challenge, since existing solutions methods are either efficient but not able to accurately capture non-linear dynamics (e.g. linear approximations), or accurate but quite resource-intensive (e.g. stacked system or stochastic Extended Path). This paper proposes two new solution approaches that try to be accurate enough and less costly. More importantly, one of those methods lets us do Kalman filtering on nonlinear models in a non-linear way, which is very important for this kind of models, in general, to be more policy-relevant. Impulse responses, simulations and Kalman filtering exercises show the advantages of those new approaches when applied to a simple, but strongly non-linear, monetary policy model. 

This paper develops a multivariate filter that incorporates labor market hysteresis for estimating potential output of the US. The extension (hysteresis) captures the idea that long and deep recessions (expansions) cause persistent damage (improvement) to the labor market, thereby reducing (increasing) potential output. Applying the model to the US data results in significantly smaller estimates of output gaps, and higher estimates of the NAIRU, after the global financial crisis, compared to estimates without hysteresis. The smaller output gaps partly explain the absence of persistent deflation despite the slow recovery during 2010-2017. The paper argued that, going forward, if strong growth performance were to continue well beyond 2018, hysteresis would had been expected to have resulted in a structural improvement in growth and employment. 

On this conference on policy spillovers, hosted by the Swiss National Bank, I delivered a presentation about my ongoing work on financial dollarization. In the presentation I argue that financial dollarization (asset substitution) exposes countries to foreign policy spillovers, even when these countries have no direct link whatsoever with that foreign economy. After a general discussion, I show my points using a non-linear macro-financial model simulations. These simulations show that financial dollarization can force monetary policy to become pro-cyclical, due to dollarization-induced price and financial stability concerns. This problem, among others, then forms the rationale for (market-based) de-dollarization policy. In addition, the presentation briefly overviews the causes of financial dollarization and possible remedies acknowledged in the literature.

In this presentation, delivered at the National Bank of Ukraine's conference, I overview the Georgia's inflation targeting reform chronology, with a particular focus on the analytical framework (sometimes called FPAS - forecasting and policy analysis system). I argue that despite macroeconomic models being very useful for structuring thinking, it's not models that give policy advice, it's an economist. Hence, for successful usage of models, central bank staff has to have a full ownership of the models, so that the final story is told by the staff, not the model. This also means that, to have credibility, the models (and their results) should be easily explainable to policy-makers. I also discuss the models we use at the National Bank of Georgia as well as the process of forecasting. The presentation is closed by a brief discussion of money market and exchange rate issues as well as the importance of transparency and communication.