Optimal Exchange Rate Policy
Under the monetary policy framework of it, the NBG has a floating exchange rate regime - meaning that exchange rate is determined by macroeconomic fundamentals - market demand and supply interactions.
The floating exchange rate is optimal for Georgia. With inflation targeting and free capital mobility, it is necessary to have a floating exchange rate regime. On the one hand, free capital mobility helps productivity growth which ultimately leads to high long-term economic growth. On the other hand, independent monetary policy is essential so that the monetary policy stance be in line with the business cycles of the Georgian economy. An independent monetary policy is optimal because Georgia's economic cycles do not match those of other developed countries, including the United States. Independent monetary policy reduces the economic fluctuations caused by business cycles. As a result, inflation and employment are more stable, which is a prerequisite for long-term economic growth and social welfare.
For a small and open economy like Georgia, external shocks are inevitable. A floating exchange rate absorbs external shocks and reduces economic volatility
Under floating exchange rate regime, foreign exchange intervention is not a major monetary policy instrument and is not frequently used. However, foreign exchange interventions, as a monetary policy tool are still used to achieve various goals. The National Bank of Georgia applies foreign exchange interventions for the following purposes: