Accommodating Monetary Policy in Transitional Economies: Particularities

Abstract

This paper surveys the particularities of monetary policy as a powerful governmental weapon in countries with transitional economies. The paper combines the theoretical analysis with empirical studies. Because in transitional economies the particular channels of monetary policy are diverse, continually changing, and uncertain reduce-form evidence are used to evaluate the empirical evidence. The brief view of relationships between movement in money supply (M1 and M2) and output level (nominal GDP) in Georgia illustrates the close correlation between them. Georgian economy like others transitional economies suffers from "Great Transitional Depression" and macroeconomic equilibrium occurs at recessionary gap. In transition countries initially supply is more elastic and elasticity increases more rapidly than that in developed countries. In these circumstances expansionary monetary policy effects real aggregate economy stimulating economic growth with mild inflation. In industrialized countries accommodating discretionary monetary policy entails cost-push inflation without any change in long-run GDP.