EXCHANGE RATE AND REPO INTEREST RATE IN SERBIA: WHAT HAPPENED IN 2012 AND LESSONS FOR REINDUSTRIALIZATION

Monetary policy changes in 2012 were unpredictable. This cannot be simply attributed to the election cycle. More fundamentally, incoherent policy measures have been present since the onset of the 2008 global recession. Within such a framework, industrialization and economic policy were treated as unrelated and not in need of alignment. In our view, they are essentially associated, but in an asymmetric way. It is difficult for monetary and exchange rate policy measures to stimulate growth, which is the essence of industrialization, but they can easily discourage it. Zence, the 6overnment of Serbia has to transparently define the industrialization policy over the medium term, and align it with other policy measures, including the monetary policy of the National 8ank of Serbia. The first thing to do so is to remove economic policy obstacles to growth. Zigh interest rates and the overvalued domestic currency are serious obstacles to industrialization in Serbia. Looking back at 2012, the National 8ank of Serbia pursued a stop-and-go monetary policy. It eventually returned to the repo rate as the main policy instrument to cure injation. This initially stabilized the exchange rate level, but increased its volatility and overvalued the currency. In the long run the exchange rate should asymptotically approach its purchasing power parity level, which has happened two times in recent history in Serbia. In the meantime, short term factors are predominant, including injation targeting monetary policy and delayed adjustment of the exchange rate to its equilibrium value. This is considered costly in terms of forgone output and export.