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Credibility and Monetary Policy: The Case of Serbia

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  • Gradimir Kozetinac
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    Abstract

    The efforts made by Serbia and other transition economies to control inflation led their central banks to pay close attention to the credibility of their monetary policy, particularly during the last decade. The monetary policy credibility in Serbia has always been a matter of discussion. One of the main indicators of the lack of credibility in Serbia’s monetary policy is a high level of foreign currency deposits in the M3 monetary aggregate caused by high eurization level. The lack of trust by the public in the national currency and its exchange rate is reflected in the large proportion of foreign deposits in the sum of demand deposits and savings and time deposits. Furthermore, the process of indexation of transactions to foreign currency (primarily the euro) is still evident. As the result, the national currency has merely the function of the means of payment and conducting transactions, but lacks the functions of measuring value, saving and crediting. This article considers the concept of credibility from both the theoretical and practical viewpoint. The advantages of high credibility are discussed, with a particular focus on Serbia’s experience with explicit inflation-control targets, and measures taken by the National Bank of Serbia to enhance the credibility of its monetary policy are explained.

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    Bibliographic Info

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    This chapter was published in:

  • Mirjana Radovic Markovic & Srdjan Redzepagic & João Sousa Andrade & Paulino Teixeira (ed.), 2011. "Serbia and the European Union: Economic Lessons from the New Member States," Books, Institute of Economic Sciences, edition 1, volume 1, number srbeu, December.
    This item is provided by Institute of Economic Sciences in its series Book Chapters with number srbeu-7.

    Handle: RePEc:ibg:chaptr:srbeu-7

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    Keywords: Monetary policy; credibility; Central Bank; inflation targeting; Serbia;

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    1. Allan Drazen & Paul R. Masson, 1993. "Credibility of Policies versus Credibility of Policymakers," NBER Working Papers 4448, National Bureau of Economic Research, Inc.
    2. van der Cruijsen, Carin & Demertzis, Maria, 2007. "The impact of central bank transparency on inflation expectations," European Journal of Political Economy, Elsevier, vol. 23(1), pages 51-66, March.
    3. Blackburn, Keith & Christensen, Michael, 1989. "Monetary Policy and Policy Credibility: Theories and Evidence," Journal of Economic Literature, American Economic Association, vol. 27(1), pages 1-45, March.
    4. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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