The National Bank of Georgia publishes the next paper in its NBG Working Paper Series. The working papers aim to present research on topics relevant to central banks and economics profession. The papers are circulated to elicit comments and encourage debate on ongoing research. The Working Paper Series are coordinated by the Macroeconomic Research Division and focus on topics relevant for central bank policy, including macroeconomic modeling, monetary and exchange rate policies, financial stability, etc.

The current working paper in the series titled "Endogenous Credibility and Economic Modeling: Adapting the Forecasting and Policy Analysis System to Modern Challenges" was prepared by Douglas Laxton, Haykaz Igityan and Shalva Mkhatrishvili. The aim of this paper is to introduce the Forecasting and Policy Analysis System (FPAS) Mark II, which incorporates Mervyn King's imperative for economic models to reflect the endogenous nature of central bank credibility based on policy actions. Credibility specifically refers to how anchored are long term inflation expectations in bond markets and by wage and price setters but also a broader consideration is whether long-term real interest rates and the exchange rate operate as shock absorbers. FPAS Mark II integrates "Monetary Policy as Risk Management" (MPRM), enhancing the framework's ability to address significant uncertainties and adapt to changing economic conditions. This new approach advocates a shift from a baseline projection to a scenario-based strategy that attempts to anticipate a diverse range of economic outcomes including non-linear such as time-varying policy credibility.

The working papers can be accessed at the following page.