Policy Briefs

What You Should and What You Should Not Expect from a Central Bank
Monday, 29 September, 2008

Central banks are often surrounded by an aura of mystique and the common man on the street seems to have very little understanding not only of what, why, and how exactly a central bank does but most importantly of how much a central bank actually can do. It is commonly believed that the job of a central bank is to print money, which sounds rather trivial. Yet, at the same time, it is often believed that a central bank can effortlessly push an economy in different directions and that it controls various powerful economic variables – interest rates, exchange rates, inflation, unemployment, and growth – that affect our everyday lives.

Significant changes are envisioned for the National Bank of Georgia as the new government and the parliament take office. The latest proposal put forward by the Georgian government is to move towards inflation targeting regime, a framework practiced by several central banks around the world (New Zealand, Canada, Euro area, U.K., Sweden, Australia, Iceland) and also being currently put in place in several transitional and developing countries.

In this article, I outline several factors that are likely to create difficulties for the NBG regardless of which monetary framework it adopts. Both policymakers and the general public should be aware of these factors, as they can be avoided as long as there is a clear understanding of roles, goals, and possibilities of all the parties involved – the parliament, the government, the central bank, and the business community – and close cooperation between them.

Project Team