Inflation Dynamics in Georgia

This paper examines inflation dynamics in Georgia using a hybrid New Keynesian Phillips Curve (NKPC) nested within a time-varying parameter (TVP) framework, which incorporates both forward-looking and backward-looking components. Estimation of a TVP model with stochastic volatility shows low inflation persistence over the entire time span (1996-2012), while revealing increasing volatility of inflation shocks since the “Rose Revolution” in 2003. Moreover, parameter estimates point to the forward-looking component of the model gaining importance following the National Bank of Georgia (NBG) adoption of inflation targeting in 2009. However, since 2011 the inertia of the expected future inflation takes a declining process while the backward-looking (lagged) component gradually climbs upward, thus, challenging the NBG in revising its target benchmark of 6%.