Financialisation of monetary policy in a dollarised economy: the case of Georgia

Abstract

Abstract This paper examines the financialisation of monetary policy—articulated as inflation targeting—and provides insight on the implications this phenomenon has on dollarised economies. The analysis provided has been developed via a thorough investigation into these dynamics in the country of Georgia: a neoliberal and foreign direct investment (FDI)-led accumulation regime with an open capital account, where the inflow of foreign capital led to enhanced lending by foreign-owned banks in foreign currency and encouraged persistent dollarisation. This paper contributes to the literature on the role of foreign capital in developing economies, and the volatilities of these economies in terms of overvalued exchange rates, capital flight and rise of public debt. This paper concludes that the financialisation of monetary policy has encouraged the process of dollarisation in Georgia. The use of inflation targeting was an ineffective strategy for Georgia’s dollarised economy due to the primacy of price stability over currency stability, the reduction of the capacity of Georgia’s central bank as well as increased economic influence of foreign-owned commercial banks.