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Monetary Policy Transmission on Real Trends in Serbia – VAR Analysis

Abstract The efficiency of channels of monetary transmission varies from country to country and is conditioned by a number of factors that determine the economic and financial system of a country. In order to achieve the set monetary policy objectives, а central bank takes certain measures and employs instruments of monetary policy. Those instruments, however, act indirectly and with a certain lag. Due to these limitations in monetary policy effects, the analysis of the monetary transmission is of essence in every country as it enables its designers to determine an optimum monetary regime. In this paper, an analysis of monetary transmission in the Republic of Serbia is made using the Vector autoregressive model (VAR model). The research conducted is significant due to a current issue of the impact of monetary policy on actual economic trends, both in the developed and developing countries. On the basis of the research it is concluded that, in the time period under observation, the biggest impact on the fluctuations in industrial production in Serbia is that of monetary aggregate, whereas the biggest impact on the fluctuation in prices is that of key policy rate movements. The results of the analysis provide guidelines to monetary authorities to take necessary steps to shorten a lag period and eliminate restrictions in transmitting monetary impulses into real economic values.