Interest Rate Transmission in a Dollarized Economy: the Case of Serbia
Authors: Milan Aleksić, Ljiljana Đurđević, Mirjana Palić, and Nikola Tasić
September 2008

Abstract: This paper investigates the efficiency of monetary policy in Serbia, а highly dollarized economy. Results suggest that the interest rate channel is shaded, and that it is dependent on the degree of dollarization. Interest rate movements are primarily determined by the movement of interest rates in the Euro zone. The impact the 2W repo rate of NBS on the lending interest rates becomes significant only after we control for the level of dollarization. The pass-through of 2W repo rate to interest rates is observed only when the dollarization falls below 64.5%. Maximum potential pass-through of 2W repo rate to interest rates (achieved at zero dollarization) is between 0.169 and 0.820, depending on the model specification.

Key words:rates, transmission mechanism, dollarization

JEL Code:E58, E43, G21

The Provision of Long-term Financing in the Transition Economies
Authors: Nikola Tasić and Neven Valev
July 2008

Abstract: A new data set from the transition economies shows that the private sector has increasing access to long-term bank financing. In several transition countries credit has similar maturity structure to that in Western Europe, while in other transition countries credit remains mostly short-term. Several factors explain these differences: the political and institutional environment, bank privatization, sustained low inflation, the levels of economic and financial development, and the establishment of credit information sharing institutions. In contrast, the share of foreign owned banks and banking sector competition have no influence on credit maturity.

Key words: development, credit maturity, liquidity, transition economies

JEL Code: G21, O16, P34

The Maturity Structure of Bank Credit: Determinants and Effects on Economic Growth
Authors: Nikola Tasić and Neven Valev
May 2008

Abstract: We investigate a new data set on the maturity of bank credit to the private sector in 74 countries. We show that credit maturity is longer in countries with strong institutions, low inflation, large financial markets, and where banks share information about borrowers. Furthermore, we extend the finance and growth literature by showing that credit maturity matters for economic growth. Economic growth is enhanced in countries where agents have access to long-term financing. Therefore, weak institutions, high inflation and other variables that reduce credit maturity have an impact on economic growth via their influence on credit maturity. The estimated effects are substantial in size.

Key words: financial development, economic growth, credit maturity, liquidity

JEL Code:G21, O40, O16, O43

Power and Weakness of Monetary Policy in Strinking a Balance Between Balance–of-Payments and Inflation-Related Objectives
Author: Diana Dragutinović
March 2008

Abstract: This paper analyzes the effects of different monetary policy transmiss ion channels in Serbia as well as their implications for the current monetary policy framework and instruments. It has become apparent that, for the time being there are two active channels: the exchange rate channel and the expectations channel. Although the effect of transmission of the exchange rate on prices is dominant, the central bank is determined to conduct its monetary policy within the framework of an inflation targeting monetary strategy. In the future, other channels -primarily the interest rate and credit channels – are expected to become active as well. However, it should be said that the use of administrative measures has so far not been efficient in strengthening these channels. The Conclusion of the paper draws attention to the difficulties faced by monetary policymakers in the absence of support from other policies, especially fiscal policy.

Key words: Monetary transmission, Monetary Strategy, Inflation Objectives, Balance- of Payments Objectives, Administrative Measures and Fiscal Policy

The paper was published in the Quarterly monitor of economic trends and policies in Serbia n. 11 Octobar –Decembar 2007

Efficiency of Reserve Requirements as a Monetary Policy Instrument
Authors:Mirjana Palić and Nikola Tasić
March 2008

Abstract: This paper investigates macroeconomic implications of using reserve requirements as a monetary policy instrument. The result suggests that reserve requirement has not been an efficient instrument. We derive this broad conclusion as this instrument does not have expected effect on the credit activity of commercial banks. Furthermore, reserve requirements increases private foreign debt, while the impact on the foreign liabilities is not statistically significant. In contrast to reserve requirements, 2-weeks repo rate of NBS decreases private foreign debt, and this impact is statistically significant. Core and headline inflations are determined by the exchange rate movements, while the direct effect of reserve requirements and NBS interest rate is not confirmed.

Key words: Reserve requirements, credit, foreign debt, inflation.

JEL Code: E31, F34, E58

Pass-Through of Exchange Rates to Prices in Serbia: 2001-2007
Author:Nikola Tasić
February 2008

Abstract: This paper estimates the pass-through effect of the exchange rate to prices in Serbia. Results obtained using ADL and VAR methodology suggest that the effect of exchange rate to inflation is Serbia is relatively high, but, as it is the case in most countries and previous studies on Serbia, incomplete and well below one. The estimate of the passthrough effect obtained using ADL methodology is between 0.13 and 0.31 in the short-run, and between 0.19 and 0.50 in the long-run. During the depreciation of the domestic currency (against the nominal effective exchange rate constructed from euro and U.S. dollar) the effect is considerably higher, and it reaches even 0.90 when we look at the retail price index.

Key words: pass-through effect, exchange rate, inflation, depreciation

JEL Code: E50, F31, E31

Key Policy Rate in Inflation Projections
Author:Ljiljana Đurđević
ISBN: 978-86-85277-10-8
December 2007

As part of preparations for the adoption of a full-fledged inflation targeting regime, last year the National Bank of Serbia began producing and publishing its inflation projections. The NBS Monetary Policy Committee opted for projections based on the key policy rate path. However, for the time being, information on the path of the key policy rate (and the exchange rate) is not publicly disclosed. The author compares this approach to a number of different practical solutions applied by other central banks to give an overview on this particular issue and to consider the ways to improve the NBS practice in order to increase the efficiency of inflation expectations management as the inflation targeting regime is further developed.

Key words: inflation projections, assumptions in inflation projections, key policy rate in inflation projections, communication with the public

Credit Growth in Serbia: Trend or Boom?
Author: Mirjana Palić, M.Sc.
ISBN: 978-86-85277-09-2
December 2007

The paper gives an overview of the main features of credit growth in transition economies, with special emphasis on developments in Serbia. It aims to evaluate the current pace of credit growth and its potential adverse impact on macroeconomic stability.
Findings of the analysis indicate that, despite strong growth in lending to the private sector, Serbia is not experiencing a credit boom, as high figures are mainly attributable to the convergence process and low starting point at the outset of transition. This implies scope for further expansion in lending.

Key words: credit growth, credit boom, convergence trend

On Fiscal Policy Effects and Mechanisms in Serbia
Author: Tamara Basic
ISBN: 978-86-85277-08-5
December 2007

Theory provides more then one explanation of both the manner and mechanisms of fiscal policy impact on inflation. Opting for a particular explanation is further complicated by the specific features of fiscal policy currently implemented in Serbia. This paper aims to recognize the effects and transmission mechanisms of fiscal policy currently in place in Serbia, which would help introduce the fiscal policy variable into the DSGE model used for monetary policy purposes.

Key words: fiscal policy, mechanisams, effects, Serbia

Fiscal Challenges in Serbia Today - What to do with Privatization Receipts
Author: Tamara Basic
June 2007

The paper analyzes the relationship between the privatization receipts and fiscal deficit in Serbia from 2002 to 2007. The empirical study incorporates monthly data series, where findings suggest that the privatization receipts have caused an increase in the country’s budgetary deficit and expenditure, and have thus endangered the long term fiscal position of Serbia. Change in use of privatization receipts is necessary if the fiscal balance is to be kept on track over the longer term. The paper suggests that the privatization receipts should be used for capital investment under conditions of sustained price stability. In case of inflation-related problems, these funds should alternatively be used for repayment of foreign debt. It is also advisable to adopt a methodology for budget presentation which is more transparent with regards to the use of privatization receipts.

Key words: privatization receipts, budget deficit, debt repayment

Exchange rate pass-through effect on prices in Serbia
Authors: Snežana Vilaret and Mirjana Palić
December 2007

Abstract: This analysis aims to quantify features of exchange rate pass-through to inflation for Serbian economy. In summary of our results, ADL and recursive VAR methodologies confirm that pass-through effect in Serbia is relatively high, but, like in most countries, incomplete and well below one. Although, the estimates are very imprecise and range from 0.3 to 0.7, depending on the specification and sample size, the thrust our results suggests that the short term pass-through elasticity is less than 0.3 and the long run elasticity is less than 0.6.

Key words: pass-through effect, exchange rate, inflation

Macroeconomic Effects of Grants and Remittances
Author: Mihailo Nikolić
May 2006

Grants and remittances tend to insulate beneficiary countries from movements in the world market, hence enabling them to build up foreign exchange reserves irrespective of their competitiveness, i.e. performance of their economies. Initial effects of these types of transfer manifest primarily as the appreciation of the exchange rate and an increase in labor costs, while the effect of remittances on wage levels is twofold. Indirect effects are manifest above all in terms of the volume and composition of investment and exports. In case of the former, it is important to sterilize monetary effects, while in the latter case it is important to avoid any investment-related decision-making based on signals of temporary character. Majority of empirically found effects of grants on economic growth are rather negative than positive. The same, though to a lesser extent, also applies to remittances. As the volume and growth rate of remittances in Serbia are higher than those of grants, in addition to their stabilizing and social function, they should also acquire a significant investment function.

Effectiveness of Reserve Money Withdrawal – empirical analysis results
Author: Mirjana Palić
December 2005

Sterilization is one of the ways to prevent automatic spill over of the effects of interventions in the foreign exchange market on the money supply. The effectiveness of sterilization can be examined by applying the concept of sterilization coefficient, off-set coefficient and neutralization coefficient.
Empirical analysis of the sterilization, off-set and neutralization coefficients was made with a view to ascertaining the extent to which the National Bank of Serbia’s sterilization policy managed to neutralize the effect of reserve money creation through net foreign exchange transactions. Another purpose of this analysis was to assess the government’s contribution to sterilization, as well as the impact of sterilization-related monetary policy measures on foreign borrowing by banks.

Econometric Analysis of Money Demand in Serbia
Authors: Mirjana Palić, Jelena Maravić
May 2005

The aim of the present paper is to assess stability of the money demand function in the Republic of Serbia and provide an empirical analysis of factors that influence money demand. The modeling was based on the standard approach that the money demand relative to the economic activity and opportunity cost of the money stocking,whereas the industrial production index was applied as the indicator of economic activity.Economic analysis of the money demand function was facilitated by the Johanes’ procedure and error-correction model with the main objective to determine the factors which, in both short- and long-term, influence its movements. The results show that money demand in the entire period under review showed signs of instability and could not be used for the purpose of targeting monetary aggregates.

Key words: money demand, error-correction model, Jonhanes’ procedure.

Serbian Monetary Conditions Index
Authors: Marina Mladenović-Komatina, Mirjana Palić, Boris Vukićević
March 2005

Monetary conditions index (MCI) is an indicator of the combined effect of short-term interest rates and the exchange rate on price stability and/or aggregate demand. The MCI enables monitoring of changes in the level of restrictiveness and/or expansiveness of monetary policy compared to the base period. It enables us to observe the impact of monetary conditions on the general level of prices and inflation process.
Depending on the circumstances, MCI can be construed by calculating weights to account for the relative effect of the exchange rate and interest rates on either aggregate demand or prices. As inflation expectations in Serbia strengthened in the prior period, the authors agreed to construe the MCI so as to account for the relative effect of the exchange rate and interest rates on price levels.
Empirical analysis of MCI movements shows that there was a relaxation in the monetary policy stance in late 2004 and early 2005. Indirect measures of monetary regulation are still ineffective in our country. Changes in reserve requirements, as the most frequently used monetary policy instrument in the prior period, did not always lead to the results expected. In this context, the authors argue that the role of interest rate as an instrument of monetary policy should be strengthened in the coming period, as well as the use of other indirect instruments of monetary regulation.

Serbia's External Debt Sustainability - June 2004; - December 2004
Autor: Branko Hinić, Marina Mladenović-Komatina, Snežana Pajić, Mirko Đukić
June 2004

Serbia will in the coming years allocate substantial amounts for the servicing of external debt which has reached around USD 14 billion. Based on various criteria of indebtedness, the study explains whether Serbia is a severely indebted country and whether its external debt is sustainable, i.e. can Serbia and under what conditions service its external debt in an unimpeded way.

Jefferson Institute - Competitiveness of the Economy of Serbia