Abstract
This paper provides a brief overview of the existing monetary policy strategies and their advantages and weaknesses. The analysis highlights the strengths of the flexible inflation targeting regime and its role in disinflation processes in countries with high inflation history. It then focuses on Serbia and discusses monetary policy instruments within the flexible inflation targeting regime which have spurred the stabilization of inflation at a low level over the past three years. In addition to prudent National Bank of Serbia (NBS) interest rate policy, the analysis suggests the role of: (i) significant improvement of NBS communication channels and transparency which enabled anchoring of inflation expectations; (ii) interventions on both segments of the foreign exchange market which reduced excessive daily exchange rate volatility and hence business conditions uncertainty with no impact on the long-term gradual depreciation trend; (iii) changes in the structure of open market operations which strengthened the market elements in liquidity operations and reduced excessive liquidity as well as changes in the reserve requirements policy which favored the long-term sources of external financing. We conclude with some challenges and opportunities for the monetary policy in the future.
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