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DSGE Model for Georgia: LEGO with Emerging Market Features

Author

Listed:
  • 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.)

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.

Suggested Citation

  • Lasha Arevadze & Shalva Mkhatrishvili & Saba Metreveli & Giorgi Tsutskiridze & Tamar Mdivnishvili & Nika Khinashvili, 2024. "DSGE Model for Georgia: LEGO with Emerging Market Features," NBG Working Papers 02/2024, National Bank of Georgia.
    • Handle: RePEc:aez:wpaper:2024-02
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    References listed on IDEAS

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    More about this item

    Keywords

    Non-tradable sticky prices; Monetary policy credibility; Core inflation;
    All these keywords.

    JEL classification:

    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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