Inflation Targeting and Exchange Rate Regimes in Serbia and Selected Transition Economies

Abstract

The paper analyzes the differences in managing exchange rate fluctuations in an inflation-targeting monetary framework in the case of (former) transition economies. Differences in managing the exchange rate fluctuations are identified according to the extent of managing as hard (dirty) versus soft managed floating, on the one hand, and according to direct managing via foreign exchange interventions and indirect managing via interest rate policy, on the other hand. Hard versus soft managed floating (sub)regimes are related to inflation-targeting (sub)regimes: hard managed floating with light inflation targeting and soft managed floating with strict or full-fledged inflation targeting. Two main motives for managing exchange rate fluctuations are emphasized in the paper: exchange rate pass-through and financial euroization. The direct and indirect managing of exchange rate fluctuations, exchange rate pass-through, and financial euroization, are investigated with vector autoregression (VAR)/vector error correction (VEC) models in the case of Poland, the Czech Republic, Slovakia, Hungary, and Serbia, in the period of combining flexible exchange rate regimes and an inflation-targeting monetary regime. The comparison of investigated indicators provides conclusions and lessons for the Serbian monetary authorities in the sense of conducting the current combination of managed exchange rate floating and an inflation-targeting regime.