Inflation and Adjustment of Relative Prices in Georgia

The paper focuses on the dynamics of relative prices of goods and services in Georgia in the period of relative macroeconomic stabilization i.e., in years 1996–2001. Structure of Georgian consumer price index (CPI) is described in details and an analysis of the dynamics of relative prices is presented. It is shown that inflation is positively correlated with the variability of relative prices as measured by the standard deviation of the distribution of prices and also with the third moment (skewness) of the overall distribution of prices. Consequently, the efforts to minimize relative price variability should be considered an important part of anti-inflationary policy (the main recommendation for conducting anti-inflationary policy should include frequent increases of administratively regulated prices slightly in excess of overall inflation so that upward adjustments can take place without inducing large price variability). Moreover, based on the examination of basic 8 groups of goods and services and 56 subgroups included into basket used for CPI computation, it is shown that in the period under study the general price level increased mainly due to the increase in prices of goods with administrative regulated prices (except "alcoholic beverages"). In contrary, free market prices for food and beverages (except "fruits and vegetables") and other goods and services (except "personal care and effects") increased much less than the general price level in the country, i.e., relatively decreased.inflation, relative prices, Georgia

Determinants of Foreign Direct Investment in Georgia

Foreign direct investment (FDI) brings host countries capital, productive facilities, and technology transfers, as well as new jobs and management expertise. Thus it is important to understand why in many countries FDI inflow is lower than it would be expected. The goal of this study is to investigate factors determining flow of FDI in Georgia. The key point of the analysis is the impact of stability of economic and legal environment on the pattern of FDI. In particular, we show that (i) the variability of basic macroeconomic fundamentals decreases the flow of FDI, (ii) high volatility of fiscal, business regulations makes FDI smaller, (iii) unstable economic environment does not attract long term investors but mainly speculative capital. Based on theoretical findings we formulate clear message to policy makers stating that in order to expect significant flow of long term and non-speculative foreign capital, first of all, a stable economic and legal environment is needed.Foreign Direct Investment, FDI, determinants of FDI, Georgia