Shota Bakhuashvili of the Class of 2017 decided to apply for an MA research scholarship at the Shota Rustaveli National Science Foundation after listening to an encouraging speech by Professor Norberto Pignatti during a lecture. Shota was ultimately successful, winning 6000 lari that he will use for books, papers, and travel to attend conferences.

The topic of his MA thesis is “Credit to GDP gap as an indicator for upcoming financial crises”, an issue he decided to write about after working at the National Bank of Georgia as an intern.

Financial and economic crises of the last few decades have revealed the drawbacks of “Classical Dichotomy” and the other similar theories concerning the border between economics and the financial sector. Shota will conduct a survey aimed at constructing a macroeconomic model which will make it possible to reveal and prevent any upcoming crisis in advance. Currently, a capital adequacy requirement is used for this purpose, which defines the minimum required regulatory capital-to-risk weighted assets ratio.

This requirement can be increased by a countercyclical capital buffer with respect to the capital-to-GDP gap. The latter methodology is not used by the National Bank of Georgia and is a totally new approach in its own right. BASET III recommends an HP filter for calculating trends and gaps; however, it should be noted that an HP filter cannot control for several variables simultaneously, so while calculating gaps it only looks at the credit-to-GDP ratio and does not consider other important macroeconomic variables. This survey will show the advantages of using a Kalman filter, and it is highly probable that by using this methodology the 2008-2009 financial crisis could have been predicted more efficiently than by using an HP filter. The model will allow bank regulators and monetary authorities to prevent crises by using a countercyclical capital buffer.

Shota will present his work at conferences, which will give him the opportunity to introduce his results to a wide audience.