What we gained and what we lost by applying the regime of inflation targeting in Serbia?

Abstract

Monetary policy is a very important segment of an all-encompassing economic policy. Monetary policies can prevent money becoming the most important source of economic disturbances. In spite of the theoretical dilemmas of opposing schools of thought, monetary policy is a powerful medium for monetary authorities in directing real economic processes.

Serbia adopted the regime of inflation targeting in September 2006, as its commitment to monetary policy management.

The assessment of the fulfillment of conditions necessary for implementing the inflation targeting regime states that Serbia has made good progress. However, two elements can be distinguished as potential limiting factors of the range of new monetary policy. The first factor represents the undeveloped financial markets either regarding the number of financial instruments available to trade or the scope of transactions making fine tuning of monetary policy in Serbia impossible to expect. The second factor is the internalization of the banking sector. Over 70% of the banking system in Serbia is owned by foreign banking groups. Considering the possibility of credit options abroad and recapitalizations by their centrals, some limitations can appear in the range of channels of interest rates by weakening the main instrument of monetary policy.