The Impact of Financial Dollarization on Inflation Targeting: Empirical Evidence from Serbia

Abstract

Serbia has applied inflation targeting against the backdrop of financial dollarization for almost a decade. In such circumstances, efficiency of monetary policy instruments decreases and begs the question of efficiency of the monetary regime efficiency issue. Although there is some empirical testing of financial dollarization effects on monetary policy performance in the inflation targeting regime for some countries, such studies for Serbia mostly cover periods of early application of the regime. Therefore, the authors analysed financial dollarization effects on prices, i.e. exchange rate pass-through effect using Serbia as an example. The study concludes that although unpredictable changes in financial dollarization strongly affect nominal exchange rate, prices level is subject to moderate but persistent increase upon this shock.

Exchange Rate Targeting Versus Inflation Targeting: Empirical Analysis of the Impact on Employment and Economic Growth

“…Other variables of interest, economic growth and exchange rate are also significant in explaining unemployment. Fabris and Vujanovic (2017) find that the effect from the financial dollarization shock on the exchange rate is strong in the case of inflation targeting. Svensson (2016) shows that "leaning against the wind" with a higher monetary policy interest rate may have benefits in terms of lower real debt growth and associated lower probability of a financial crisis but has costs in terms of higher unemployment and lower inflation, importantly including a higher cost of a crisis when the economy is weaker.…”

Interest Rate Policy and Exchange Rates Volatility Lessons from Indonesia

“…Osawa (2006) argues intervention of the policy maker in the exchange rate movements may generate the risk of converting the exchange rate into a nominal anchor that takes over the inflation target. The unpredictable changes in financial dollarization strongly affect the nominal exchange rate (Fabris and Vujanović, 2017). As a result, IT regime has a little effect on the exchange rate stability.…”

Türki̇ye’de Fi̇nansal Dolari̇zasyonun Enflasyon Ve İsti̇hdam İle Olan Etki̇leşi̇mi̇

“…Sonuç olarak bir ekonomideki dolarizasyon süreci her zaman enflasyonla güçlü bir şekilde ilişkilidir. Literatürdeki birçok çalışma (Karacal ve Bahmani-Oskooee, 2008;Mengesha, 2013;Fabris ve Vujanović, 2017;Park ve Son, 2020;vb. ) bu ilişkiyi doğrulamaktadır.…”