Serbian Monetary Conditions Index

Marina Mladenovic-Komatina, Mirjana Palic and Boris Vukicevic
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Marina Mladenovic-Komatina: National Bank of Serbia
Mirjana Palic: National Bank of Serbia
Boris Vukicevic: National Bank of Serbia

Working papers from National Bank of Serbia

Abstract: Monetary conditions index (MCI) is an indicator of the combined effect of short-term interest rates and the exchange rate on price stability and/or aggregate demand. The MCI enables monitoring of changes in the level of restrictiveness and/or expansiveness of monetary policy compared to the base period. It enables us to observe the impact of monetary conditions on the general level of prices and inflation process. Depending on the circumstances, MCI can be construed by calculating weights to account for the relative effect of the exchange rate and interest rates on either aggregate demand or prices. As inflation expectations in Serbia strengthened in the prior period, the authors agreed to construe the MCI so as to account for the relative effect of the exchange rate and interest rates on price levels. Empirical analysis of MCI movements shows that there was a relaxation in the monetary policy stance in late 2004 and early 2005. Indirect measures of monetary regulation are still ineffective in our country. Changes in reserve requirements, as the most frequently used monetary policy instrument in the prior period, did not always lead to the results expected. In this context, the authors argue that the role of interest rate as an instrument of monetary policy should be strengthened in the coming period, as well as the use of other indirect instruments of monetary regulation.

Keywords: pass-through effect; exchange rate; inflation (search for similar items in EconPapers)
Pages: 13 pages
Date: 2005-03
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