On Complex Inflation Targeting and Modified Inflation Indicators (Experience of Georgia)

The paper analyzes inflation targeting which used in many countries as a tool for the monetary policy of central banks. The study of the experience of inflation targeting over the past quarter century shows a number of shortcomings. The important one is that inflation targeting is powerless in relation to import inflation. This problem is particularly acute for import-dependent countries. The authors summarize the failure of inflation targeting to influence the import of inflation regarding inflation caused by the increase in production costs. The problem is studied by the example of post-communist Georgia (that uses inflation targeting) and its major trading partners. The authors analyze various modifications of the inflation indicator, such as agflation, munflation, and imflation. It is shown that the first two reflect price fluctuations on the nutrition, medical care, medication and utilities. Imflation reflects the dynamics of import prices on the domestic market, in the formation of which the exchange rate of the national currency is of great importance. The indicators of agflation and munflation together with the traditional indicator of inflation should become one of the important macroeconomic indicators for governments that develop economic and social policies. The authors propose a new approach to monetary policy, called complex inflation targeting. In this case, monetary policy targets are not only inflation, but also imflation. As for the exchange rate of the national currency, it should be influenced by the actual level of the imflation indicator.

1. Тhе Stiglitz report. Reforming the international monetary and financial systems in the wake of the global crisis. Report of the UN Commission of Financial Experts. Transl. from Eng. Moscow: Mezhdunarodnye otnosheniya; 2012. 328 p. (In Russ.).

2. Stark J. The global financial crisis and the role of monetary policy. Speech at the 13 th Annual Emerging Markets Conference 2011 (Washington, 24 Sept., 2011). European Central Bank. 24 Sept., 2011. URL: https://www.ecb.europa.eu/press/key/date/2011/html/sp110924.en.html (accessed on 22.05.2019).

3. Arestis P. Monetary policy since the global financial crisis. In: Arestis P., Sawyer M., eds. Economic policies since the global financial crisis. Cham: Palgrave Macmillan; 2017:1-39.

4. Sinelnikova-Muryleva E.V., Grebenkina A. M. Optimal inflation and inflation targeting: International experience. Finansy: teoriya i praktika = Finance: Theory and Practice. 2019;23(1):49-65. DOI: 10.26794/2587-5671-2019-23-1-49-65 (In Russ.).

5. Golovnin M. Yu. The monetary policy in countries of Central and Eastern Europe in the globalization context: Regimes and tools. Vestnik finansovogo universiteta = Bulletin of the Financial University. 2017;21(1):78-86. URL: https://financetp.fa.ru/jour/article/view/328/255 (accessed on 22.05.2019). (In Russ.).

6. Brito R. D., Bystedt B. Inflation targeting in emerging economies: Panel evidence. Journal of Development Economics. 2010;91(2):198-210. DOI: 10.1016/j.jdeveco.2009.09.010

7. Kartaev F. S. Does exchange rate management improve inflation targeting Efficiency? Den’gi i kredit = Russian Journal of Money and Finance. 2017;(2):63-68. URL: https://docplayer.ru/45445384-Uvelichivaet-li-upravlenievalyutnym-kursom-effektivnost-inflyacionnogo-targetirovaniya.html (accessed on 22.05.2019). (In Russ.).

8. Cabral R., Carneiro F. G., Mollick A. V. Inflation targeting and exchange rate volatility in emerging markets. World Bank Group. Policy Research Working Paper. 2016;(7712). URL: http://documents.worldbank.org/curated/en/404741467995904010/pdf/WPS 7712.pdf (accessed on 22.05.2019).

9. Edwards S. The relationship between exchange rates and inflation targeting revisited. NBER Working Paper. 2006;(12163). URL: https://www.nber.org/papers/w12163.pdf (accessed on 22.05.2019).

10. Kartaev F. Is inflation targeting useful for economic growth? Voprosy ekonomiki. 2017;(2):62-74. (In Russ.).

11. Suryanarayana M. H. Agflation and the PDS: Some issues. Indira Gandhi Institute of Development Research. IGIDR Working Paper. 2008;(009). URL: http://www.igidr.ac.in/pdf/publication/WP-2008-009.pdf (accessed on 22.05.2019).

12. Chorafas D. N. Energy, environment, natural resources and business competitiveness: The fragility of interdependence. Aldershot: Gover Publishing Ltd.; 2011. 386 p.

13. Papava V., Charaia V. On the necessity of modification of the inflation index for the relatively poor worlds and Georgia’s experience. Ekonomisti. 2017;(3):6-19. (In Russ.).

14. Charaia V., Papava V. Agflation and other modifications of inflation (the cases of Georgia and its neighboring countries). Annals of Agrarian Science. 2018;16(2):201-205. URL: https://www.sciencedirect.com/science/article/pii/S1512188718300897?via%3Dihub. DOI: 10.1016/j.aasci.2018.04.007

15. Charaia V., Papava V. The role of inflation and its targeting for low-income countries (Lessons from post-communist Georgia). European Journal of Economic Studies. 2017;6(2):96-103. URL: http://ejournal2.com/journals_n/1504096069.pdf. DOI: 10.13187/es.2017.6.96

16. Sherwin M. Inflation targeting — The New Zealand experience. In: Price stability, inflation targets and monetary policy. Proc. conf. (May 1, 1997). Ottawa: Bank of Canada; 1997:261-273. URL: https://www.bankofcanada.ca/wp-content/uploads/2010/07/cn97-14.pdf (accessed on 22.05.2019).

17. Archer D. J. Inflation targeting in New Zealand. In: Seminar on inflation targeting (20-21 March, 2000). Washington, DC: International Monetary Fund; 2000. URL: https://www.imf.org/external/pubs/ft/seminar/2000/targets/archer.htm (accessed on 22.05.2019).

18. Bernanke B. S., Laubach T., Mishkin F. S., Posen A. S. Inflation targeting: Lessons from the international experience. Princeton: Princeton University Press; 1998. 304 p.

19. Brash D. Inflation targeting 14 years on. In: American Economic Association conf. (Atlanta, 5 Jan., 2002). Reserve Bank of New Zealand. 2002. URL: https://www.rbnz.govt.nz/research-and-publications/speeches/2002/speech2002-01-05 (accessed on 22.05.2019).

20. Fischer A. M., Orr A. B. Monetary policy credibility and price uncertainty: The New Zealand experience of inflation targeting. OECD Economic Studies. 1994;(22):155-179. URL: http://www.oecd.org/newzealand/33940940.pdf (accessed on 22.05.2019).

21. Bollard A., Karagedikli O. Inflation targeting: The New Zealand experience and some lessons. Reserve Bank of New Zealand. 2006. URL: https://www.rbnz.govt.nz/research-and-publications/speeches/2006/speech2006-01-18 (accessed on 22.05.2019).

22. Debelle G., Masson P., Savastano M., Sharma S. Inflation targeting as a framework for monetary policy. IMF Economic Issues. 1998;(15). URL: https://www.imf.org/external/pubs/ft/issues/issues15/ (accessed on 22.05.2019).

23. Mishkin F., Schmidt-Hebbel K. Monetary policy under inflation targeting: An introduction. Central Bank of Chile Working Papers. 2006;(396). URL: http://si2.bcentral.cl/public/pdf/documentos-trabajo/pdf/dtbc396.pdf (accessed on 22.05.2019).

24. Kartaev F. S., Filippov A. P., Khazanov A. A. Inflation targeting and real GDP dynamics: Cross-country evidence. Zhurnal Novoi ekonomicheskoi Assotsiatsii = Journal of the New Economic Association. 2016;(1):107-128. URL: http://www.econorus.org/repec/journl/2016-29-107-128r.pdf (accessed on 22.05.2019). (In Russ.).

25. Ayres K., Belasen A. R., Kutan A. M. Does inflation targeting lower inflation and spur growth? Journal of Policy Modeling. 2014;36(2):373-388. DOI: 10.1016/j.jpolmod.2012.12.008

26. Barro R. J. Inflation and economic growth. NBER Working Paper. 1995;(5326). URL: https://www.nber.org/papers/w5326.pdf (accessed on 22.05.2019).

27. Burdekin R. C., Denzau A. T., Keil M. W., Sitthiyot T., Willett T. D. When does inflation hurt economic growth? Different nonlinearities for different economies. Journal of Macroeconomics. 2004;26(3):519-532. DOI: 10.1016/j.jmacro.2003.03.005

28. Mollick A., Cabral R., Carneiro F. Does inflation targeting matter for output growth? Evidence from industrial and emerging economies. Journal of Policy Modeling. 2011;33(4):537-551. DOI: 10.1016/j.jpolmod.2011.03.010

29. Vega M., Winkelried D. Inflation targeting and inflation behavior: A successful story? International Journal of Central Banking. 2005;1(3):153-175. URL: https://www.ijcb.org/journal/ijcb05q4a5.pdf (accessed on 22.05.2019).

30. Frankel J. The death of inflation targeting. Project Syndicate. 16 May, 2012. URL: https://www.projectsyndicate.org/commentary/the-death-of-inflation-targeting?barrier=accesspaylog (accessed on 22.05.2019).

31. Jones C. BIS warns of too much focus on inflation. Financial Times. 26 June, 2016. URL: https://www.ft.com/content/5e4d0560-3a13-11e6-9a05-82a9b15a8ee7 (accessed on 22.05.2019).

32. Tovar C. E., ed. Perspectives on inflation targeting, financial stability and the global crisis. Bank for International Settlements. BIS Papers. 2010;(51). URL: https://www.bis.org/publ/bppdf/bispap51.pdf (accessed on 22.05.2019).

33. Weber A. Rethinking inflation targeting. Transl. from Eng. Project Syndicate. 8 June, 2015. URL: https://www.project-syndicate.org/commentary/rethinking-inflation-targeting-price-stability-by-axel-weber-1-2015-06/russian?barrier=accesspaylog (accessed on 22.05.2019). (In Russ.).

34. Stiglitz J. E. The failure of inflation targeting. Transl. from Eng. Project Syndicate. 6 May, 2008. URL: https://www.project-syndicate.org/commentary/the-failure-of-inflation-targeting/russian?barrier=accesspaylog (accessed on 22.05.2019). (In Russ.).

35. McConnell C.R., Brue S. L. Economics: Principles, problems, and policies (in 2 vols.). Vol. 1. Transl. from Eng. Moscow: Respublika; 1992. 399 p. (In Russ.).

36. Papava V., Beridze T. Economic reforms in Georgia. Rossiiskii ekonomicheskii zhurnal = Russian Economic Journal. 1998;(1):58-64. (In Russ.).

37. Gurgenidze L., Lobzhanidze M., Onoprishvili D. Georgia: From planning to hyperinflation. Communist Economies and Economic Transformation. 1994;6(3):259-289. DOI: 10.1080/14631379408427794

38. Khaduri N. Mistakes made in conducting economic reforms in post-communist Georgia. Problems of Economic Transition. 2005;48(4):18-29.

39. Papava V.The Georgian economy: Problems of reform. Eurasian Studies. 1995;2(2):52-62.

40. Kakulia M. Before and after the introduction of the Lari: Georgian national currency in retrospect. In: Ismailov E. M., ed. Central Eurasia: National currencies. Stockholm: CA&C Press AB; 2008:188-200. (In Russ.).

41. Papava V. On the first-generation post-communist reforms of Georgia’s economy (A retrospective analysis). The Caucasus & Globalization. 2011;5(3-4):20-30.

42. Papava V. The Georgian economy: From ‘shock therapy’ to ‘social promotion’. Communist Economies and Economic Transformation. 1996;8(2):251-267. DOI: 10.1080/14631379608427856

43. Wang J.-Y. The Georgian hyperinflation and stabilization. IMF Working Paper. 1999;(65). URL: https://www.imf.org/en/Publications/WP/Issues/2016/12/30/The-Georgian-Hyperinflation-and-Stabilization-3020 (дата обращения: 22.05.2019).

44. Wellisz S. Georgia: A brief survey of macroeconomic problems and policies. Russian & East European Finance and Trade. 1999;35(1):6-31.

45. Kakulia M., Gigineishvili N. The primary objectives and priorities of monetary policy in Georgia. Problems of Economic Transition. 2005;48(4):30-42.

46. Papava V. Economy of Georgia: In search of development model. Mir Peremen = The World of Transformations. 2013;(3):47-58. (In Russ.).

47. Anguridze O., Charaia V., Doghonadze I. Security problems & modern challenges of the Georgian national currency. Tbilisi: Ivane Javakhishvili Tbilisi State University; 2015. 47 р. URL: http://press.tsu.ge/data/file_db/nashromebi/Security-Problems-Modern-Challenges-of-the-Georgian-National-Currency2%20(1).pdf (accessed on 22.05.2019).

48. Sachs J. D. The end of poverty: Economic possibilities for our time. New York: Penguin Press; 2005. 396 p.

49. Roser M., Ortiz-Ospina E. Global extreme poverty. Our World in Data. 2013. URL: https://ourworldindata.org/extreme-poverty (accessed on 22.05.2019).

50. Kakulia M., Kapanadze N., Khurkhuli L. Chronic poverty and income inequality in Georgia: Economicstatistical research. Tbilisi: Friedrich-Ebert-Stiftung; 2017. 56 p. URL: https://www.gfsis.org/files/library/pdf/English-2509.pdf (accessed on 22.05.2019).

51. Mashirova S. P., Stepashova A. Yu. Consumer basket cost analysis. Molodoi uchenyi = Young Scientist. 2015;(1):250-252. URL: https://moluch.ru/archive/81/14639/ (accessed on 22.05.2019). (In Russ.).

52. Charaia V., Papava V. From inflation to imflation, agflation and munflation. The Market Oracle. 6 April, 2017. URL: http://www.marketoracle.co.uk/Article58686.html (accessed on 22.05.2019).

53. Khvostik E. Turkish inflation takes Venezuelan acceleration: Rising prices hit a record high in 15 years. Kommersant. 3 Oct., 2018. URL: https://www.kommersant.ru/doc/3759234 (accessed on 22.05.2019). (In Russ.).

54. Daragahi B. Erdogan is failing economics 101. Foreign Policy. 25 May, 2018. URL: https://foreignpolicy.com/2018/05/25/erdogan-is-a-mad-economist-and-turkey-is-his-laboratory/ (accessed on 22.05.2019).

55. Erol M. E. Turkey’s crisis and the curious case of the ‘fight against inflation’. London School of Economics and Political Science. 25 Feb., 2019. URL: https://blogs.lse.ac.uk/mec/2019/02/25/turkeys-crisis-and-the-curiouscase-of-the-fight-against-inflation/ (accessed on 22.05.2019).

56. Nakhoul S., Evans D. Erdogan has limited options to save Turkey from financial crisis. Reuters. 4 Sept., 2018. URL: https://www.reuters.com/article/us-turkey-currency-analysis/erdogan-has-limited-options-to-saveturkey-from-financial-crisis-idUSKCN1LK215 (accessed on 22.05.2019).

57. Kara H., Öğünç F., Sarikaya C. Inflation dynamics in Turkey: A historical accounting. CBT Research Notes in Economics. 2017;(3). URL: http://www.tcmb.gov.tr/wps/wcm/connect/bbff9d3a-f0dc-462c-8c62-c3eb19e09109/en1703eng.pdf?MOD=AJPERES&CACHEID=ROOTWORKSPACE-bbff9d3a-f0dc-462c-8c62-c3eb19e09109-m3fw5t2 (accessed on 22.05.2019).

58. Jabara C. L. How do exchange rates affect import prices? Recent economic literature and data analysis. U. S. International Trade Commission. Office of Industries Working Paper. 2009;(ID-21). URL: https://www.usitc.gov/publications/332/ID-21.pdf (accessed on 22.05.2019).