Exchange Rate Arrangements and Monetary Policy in Southeastern Europe: An Update (2004–2007)

This contribution updates a study published in 2004. Four of the ten countries analyzed (Bosnia and Herzegovina, Bulgaria, Croatia and the Republic of Macedonia) continue to feature hard pegs and nominal exchange rate anchors to the euro, while four others (Albania, Romania, Serbia and Turkey) conduct loosely managed floats, and – with the exception of Albania – introduced inflation targeting in 2005 or 2006. One country (Montenegro) and one nonsovereign territory (Kosovo) remain unilaterally euroized. Although all countries have upheld prudent monetary policies supported by strengthened fiscal positions, disinflation has slowed down in recent years. Recent upticks of inflation have been triggered by rising wage pressures, accelerating credit booms, food price spikes caused by extreme weather conditions, and increases in oil prices, utility tariffs and indirect taxes (with some of the latter being one-off factors). While the antiinflationary effectiveness of pegs continues to be satisfactory overall, the comparatively brief experience with inflation targeting has already delivered good results in some cases. In other cases it may yet be too early to judge. The impact of capital flows on monetary policy has been on the rise, creating new challenges, and triggering repercussions (in both ways) for inflation rates.