Edited by Gill Hammond, Ravi Kanbur and Eswar Prasad
Chapter 12: Monetary and Fiscal Policy Mix in Serbia: 2002–07
12. Monetary and fiscal policy mix in Serbia: 2002–07 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....
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