How appropriate is Serbia's move to Inflation Targeting?
A common feature amongst the majority of countries within the Western Balkans is a high level of de facto (as opposed to official) dollarization. This is often characterised in the literature (e.g. Ize and Levy Yeyati, 2003) as a rational choice by individual private agents in the face of a weak domestic currency and periods of high inflation. However, it is also widely considered to complicate economic policy setting. Traditionally, countries with high levels of de facto dollarization have been discouraged from pursuing inflation targeting because exchange rate movements can have significant adverse effects on the economy. Recent research challenges this view (Leiderman, Maino and Parrado, 2006). The experience of highly euroised Serbia is an interesting test case then as it moves towards inflation targeting. To what extent has it met the initial conditions thought helpful for the move to inflation targeting? Can it overcome difficulties posed in areas where it does not meet those conditions?