Monetary Policy Frameworks for Emerging Markets
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Monetary Policy Frameworks for Emerging Markets

Edited by Gill Hammond, Ravi Kanbur and Eswar Prasad

Financial globalization has made monetary policy formulation in emerging market economies increasingly complicated. This timely set of studies looks at the turmoil in global financial markets, which coupled with volatile inflation poses serious challenges for central banks in these countries. Featuring papers from the research frontier and front-line policymakers in developing and emerging market economies, the book addresses questions such as ‘What monetary policy framework is most suitable for these countries to confront the new challenges while they continue to open up to trade and financial flows?’, ‘What are the linkages between monetary stability and financial stability?’ and ‘Is inflation targeting or a fixed exchange rate regime preferable for developing and emerging markets?’
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Chapter 12: Monetary and Fiscal Policy Mix in Serbia: 2002–07

Diana Dragutinovic


Diana Dragutinovic INTRODUCTION 12.1 Striking the right balance in the monetary–fiscal policy mix is difficult at the best of times, not least when implementing an inflation-targeting regime in unstable emerging market conditions, such as those prevailing in Serbia. This chapter presents the thoughts of a monetary policymaker on how to strike this balance against the backdrop of the recent experience in monetary and fiscal developments in Serbia. The National Bank of Serbia (NBS) adopted inflation targeting as its new monetary policy framework in August 2006, facing difficult starting conditions and many challenges. Inflation targeting was born after the failure of the previous regime, which focused on the real exchange rate and involved periodic exchange rate devaluations, resulting in high inflation as well as a high current account deficit. Inflation targeting was chosen as the only reasonable alternative at the time, despite many challenges in terms of low credibility and weak monetary transmission. The starting conditions for implementing inflation targeting could hardly have been less favorable. Gaining credibility for the new regime required strenuous efforts given the country’s turbulent hyperinflation past, high-inflation expectations and less than full institutional independence. Inflation had to be contained despite weaknesses in monetary transmission stemming from fast exchange rate pass-through, a high degree of real and financial euroization, very shallow money and exchange rate markets, and a high share of regulated prices. Moreover, macroeconomic policy options were constrained by a large negative current account deficit. In addressing these challenges, the NBS has been implementing a...

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