DSGE Model for Georgia: LEGO with Emerging Market Features

Lasha Arevadze (), Shalva Mkhatrishvili (), Saba Metreveli (), Giorgi Tsutskiridze (), Tamar Mdivnishvili () and Nika Khinashvili
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Lasha Arevadze: Macroeconomic Research Division, National Bank of Georgia
Shalva Mkhatrishvili: Head of Macroeconomics and Statistics Department, National Bank of Georgia
Saba Metreveli: Macroeconomic Research Division, National Bank of Georgia
Giorgi Tsutskiridze: Macroeconomic Research Division, National Bank of Georgia
Tamar Mdivnishvili: Macroeconomic Research Division, National Bank of Georgia
Nika Khinashvili: PhD candidate, Geneva Graduate Institute.

No 02/2024, NBG Working Papers from National Bank of Georgia

Abstract: Last couple of decades of research has significantly advanced New Keynesian DSGE modeling. While each of such models faces its own important limitations, it can still contribute to robust policy analysis as long as we consolidate relevant macroeconomic features in it and remain conscious of the limitations. With this paper we are introducing a DSGE model for Georgia with features relevant for Emerging Market Economies (EMEs), characterized with large number of real and nominal imperfections. While some model features are already standard to existing DSGE frameworks, we also emphasize aspects particularly relevant to EMEs. These include 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, and other non-stationarities. 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 model for macro-financial analysis in Georgia, representing a key addition to the NBG’s existing FPAS, though its adaptability can extend to other country contexts as well.

Keywords: Non-tradable sticky prices; Monetary policy credibility; Core inflation (search for similar items in EconPapers)
JEL-codes: E10 E31 E52 E58 (search for similar items in EconPapers)
Pages: 218 pages
Date: 2024-05
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ifn, nep-opm and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:aez:wpaper:2024-02

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