Summary

Inflation targeting is one of the most actual issues in modern monetary policy. Inflation target is an important landmark for a money market, plays a crucial role in planning and implementing various macroeconomic decisions. Thus, setting a correct target and timely evaluation of its efficiency has a key impact on success of the whole process of targeting.

Switching to inflation targeting regime was caused by low efficiency of conventional methods in face of growing globalization. Initially targeting was used in developed countries, but since 1990s it has also been implemented by countries with transitional economies.

Inflation targeting means adopting a concrete, transparent, quantitative target value of inflation rate, which is used as a landmark for monetary policy decisions, while for private sector inflation target forms inflation expectations. The target is usually set by the central bank in collaboration with the government.

In this article two different approaches were used to assess inflation targeting efficiency in Georgia: standard deviation of actual inflation rates from its trend and autocorrelation of a corresponding time series. In order to compare periods before and after implementation of inflation targeting, two time periods were used: 2000-2008 and 2009-2017. Monthly time series of annual inflation rates were used for analysis.

Initially, comparison of these two periods reveals that standard deviation of actual inflation rate after the adoption of targeting regime in Georgia (2009) is higher than before this point, which at the first glance points out that targeting was not successful. However, this might be caused by after-crisis shock. In order to eliminate the effect of post-crisis period, data from 2009 to 2012 was excluded from calculations. As a result, recalculated standard deviation for the period of inflation targeting was lower than before 2009. This means that since adopting targeting regime inflation rate dynamics is closer to its trend and is less prone to random shocks. This proves efficiency of targeting regime in Georgia.

Another method of assessment of targeting efficiency encompasses comparing autocorrelation functions for periods before and after implementing the regime. This task was carried out using Eviews software, using time series adjusted for crisis shocks. Comparison of autocorrelation functions for periods 2000-2008 and 2012-2017 reveals that autocorrelation for first 12 lags (one year) during the targeting regime is higher; while for a longer lags it changes conversely. This means that after implementation of inflation targeting in Georgia actual inflation rate has become less “permanent” or “inertial”, i.e. it is less depended on its long-term past values. In other words, inflation became depended more on policy values, than on its long-term trend, which also speaks for efficiency of inflation targeting in Georgia.