Baku, Azerbaijan, Sept.2
By Tamilla Mammadova – Trend:
The opinion that the growth of the money supply causes inflation or the depreciation of the national currency exchange rate is wrong, Trend reports with reference to the National Bank of Georgia.
“In the inflation targeting mode, all central banks, including the National Bank of Georgia, use the discount rate as their operational goal. The change in the discount rate, not monetary aggregates, gives the market information about whether monetary policy has been changed. As for changes in the monetary aggregate, this only indicates an increase or decrease in the demand for money. Accordingly, the opinion that the growth of the monetary aggregate causes inflation and / or the depreciation of the lari is not correct,” the bank said.
According to the bank, the fact that there is a high correlation between the money supply and the exchange rate is a misconception.
Often, a high correlation between two variables leads to the fact that both variables increase over time (both the money supply and the exchange rate). For example, there is a high correlation between the exchange rate and the inflow of foreign currency through various sources in Georgia, although this is only because all statistics are characterized by an upward trend.
“Therefore, in the context of inflation targeting, money supply is absent and cannot be an indicator of monetary policy, and any conclusion based on money supply will only give a false conclusion about the future dynamics of inflation or exchange rates,” said the bank.