Identifying the Phillips Curve in Georgia

Lasha Arevadze (), Tamta Sopromadze, Giorgi Tsutskiridze and Shalva Mkhatrishvili
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Lasha Arevadze: Macroeconomic Research Division, National Bank of Georgia

No 01/2020, NBG Working Papers from National Bank of Georgia

Abstract: There is an ongoing debate around the flattening of the Phillips Curve throughout the world. One of the most important challenges in looking at the statistical relationship between inflation and cyclical position of the economy is the endogenous nature of monetary policy. If monetary policy is successful in insulating the economy from demand shocks, all we are left with in the data is the effects of supply shocks. This makes the link between inflation and aggregate demand look negative, even if the underlying positively-sloped Phillips Curve relationship is alive and well. That's why it is important to take the endogeneity of monetary policy into account when estimating the Phillips Curve econometrically. In this paper, we attempt to do that on the Georgian data using two econometric approaches: GMM and ARDL. Our results indicate that the slope of the Phillips Curve in Georgia is positive but relatively flat (despite the fact that it is still steeper than in the developed world). The resulting high sacrifice ratio makes it all the more important for the National Bank of Georgia to remain vigilant and proactive in anchoring inflation expectations. In addition, we show that half of economic agents' inflation expectations in Georgia are backward-looking (with the other half being forward-looking). This, despite important improvements during the last decade, implies still significant room for monetary policy to further anchor inflation expectations to its target.

Keywords: Phillips Curve; Inflation; Monetary policy; GMM; ARDL (search for similar items in EconPapers)
JEL-codes: C13 E3 E52 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2020-01
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Citations: View citations in EconPapers (1)

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