Inflation targeting, as a monetary policy model, is well-defined both theoretically and practically. Successful implementation relies on a comprehensive understanding by the central bank’s management and staff, as well as broader financial, economic, political and public awareness, economist Dejan Šoškić told Forbes Serbia. According to Šoškić, true success in inflation targeting is achieved only when inflation aligns closely with the set target.
Any deviation from the inflation target, whether above or below, is seen as a failure of the inflation targeting model. Šoškić notes that, from 2012 to the present, inflation in Serbia has predominantly fallen outside the target range.
Šoškić highlights several critical prerequisites for effective inflation targeting, as identified in scientific literature:
- Institutional independence: The central bank must operate with significant institutional autonomy. This includes the personal independence of its leadership, free from political influence, as well as financial independence to generate its own income and operational autonomy without substantial external influence, particularly from political or other power centers.
- Research capacity: The central bank needs a robust research infrastructure capable of high-quality forecasting of inflation trends and advanced financial modeling. Understanding the transmission mechanisms—how monetary policy tools affect future inflation—is essential.
- Economic structure: The country should have a competitive and relatively free market, with economic activity not overly sensitive to price movements in commodities like food and energy, or to exchange rate fluctuations.
- Financial system health: A sound financial system with strong bank capitalization and a functioning securities market is crucial. High dollarization (or euroization in Serbia) can undermine the effectiveness of the central bank’s primary tool for inflation targeting—the reference interest rate.
Šoškić points out that Serbia falls short on these theoretical prerequisites. The central bank’s independence is minimal, its research capabilities are questioned due to frequent inaccuracies in inflation forecasts, and Serbia has high euroization compared to other Central, Eastern and Southeastern European countries. Additionally, Šoškić criticizes the central bank’s leadership for a lack of understanding of the monetary model in place and for highlighting exchange rate stability as a success, which contradicts the inflation targeting agreement stipulating that exchange rate goals should not be set.
The core of Šoškić’s argument is that if the central bank meets its inflation target, it can claim success in implementing the inflation targeting model. Conversely, consistent failure to meet the target, as observed in Serbia since 2012, signifies a failure of the model. This persistent deviation from the target reflects a broader issue in the effective execution of monetary policy in Serbia.
