Working papers

December 2015
Abstract: This paper studies the determinants of shifts in debt composition among emerging market non-financial corporates. We show that institutions and macro fundamentals create an enabling environment for bond market development. During the recent boom episode, however, global cyclical factors accounted for most of the variation of bond shares in total corporate debt. The sensitivity to global factors appears to vary with relative bond market size rather than local fundamentals. Foreign bank linkages help explain why bond markets increasingly substituted for banks in channeling liquidity to EMs. Our results highlight the risk of capital flow reversal in EMs that benefited from the upturn in the global financial cycle mostly due to their liquid markets rather than strong fundamentals.
Key words: Bond markets, Capital flows, Emerging Markets
JEL Code: F30, G15, G20, G30

August 2015
Abstract: This paper analyses the determnants of newly built dwelling prices in Serbia in a panel of 24 cities over the period 2011-2014. Results suggest that dwelling prices primarily tend to rise with populations growth and real total net wages as a proxy of household incomes, while declines in effective interest rate on housing are associated with higher dwelling prices. Additional explanatory variables, such as the level of development of observed cities, geographical distance from the capital, or real GDP dinamics in the country, even though the correct sign, didn't have statisticaly significance influence on the dependant variable.
Key words: dwelling, prices, real estate market

December 2014
Abstract: We study drivers of permanent and transitory deposit dollarization on a sample of CESE countries using panel cointegration techniques. The results suggest that a positive cointegration relationship exists between permanent dollarization and minimum variance portfolio (MVP) share. This provides additional empirical validation of MVP method as the standard tool for analysing financial dollarization in the long run. In the long run agents make savings decisions based on relative volatilities of inflation and nominal depreciation rates and do not take into the account interest rate spread. In the short run dollarization exhibits persistence. Somewhat different factors affect dollarization in the short than in the long run. Namely, apart from MVP share, dollarization of deposits is in that case driven, also, by interest rate spread and nominal exchange rate movements. Our results suggest that affecting dollarization through change in the interest rate spread may have short term impact on dollarization. In the long run, however, for de-dollarization it is critical to reduce volatility of inflation compared to volatility of exchange rate depreciation.
Key words: Permanent and transitory dollarization, Transition economies
JEL Code: C33, F31, G11

November 2013
Abstract: This paper investigates macroeconomic determinants of the realisation of credit risk in the banking book (measured by the ratio of loan loss provisions to the value of total gross loans) using a panel data set of 33 Serbian banks spanning from 2008Q3 to 2012Q2. Three different panel methods were applied. Two types of loan portfolios were investigated separately – loans to households and loans to enterprises. The results indicate that a deteriorating business cycle and exchange rate depreciation led to the worsening of the quality of banks’ loan portfolio in Serbia in the period under review. In addition, statistical evidence indicates that the CPI inflation additionally affected the quality of loans to enterprises and households. Furthermore, we find that household loan portfolios are also sensitive to changes in the short-run interest rates.
Key words: Loan portfolio, Credit quality, Economic activity, Exchange rate, Foreign currency induced Credit risk, Serbia
JEL Code: C33, E51, E58, G21, G32

April 2013
Abstract: In this paper we seasonally adjust, step by step, monthly series of Serbian industrial production for the period 1994–2012, using the X-12-ARIMA method. In the pre-adjustment phase, we corrected the series for the automatically detected (using RegARIMA) effects of outliers, such as the level shift for NATO bombing, and the temporary change for the political changes of 5 October 2000 etc, as well as the (user-specified) ramp effect for the beginning of the global financial crisis. Using RegARIMA we also estimated that one working day less, because of weekends or holidays, reduces industrial production by 1.5%. These effects were also excluded from the series at this stage, before entering the next, X-11 phase. The final seasonal component in the X-11 phase, shows declining seasonal fluctuations of the series over the last 10 years, that is a lower seasonal factor for winter-autumn months and higher for summer months. Besides adjusting for the seasonal factor, we also adjusted the series for the calendar effect (number of working days and holidays), thus providing a more realistic picture on the movements in industry. Seasonally adjusted series contains all the outliers, with temporary ones being included in the irregular component, and permanent ones in the trend. The revisions analysis showed January as the least “reliable” month, that is the month for which seasonally adjusted data are revised mostly when new data are added to the series.
Key words: X-12-ARIMA, seasonal adjustment, industrial production
JEL Code: C22

November 2012
Abstract: We model strategic trading by a rent-seeking insider, who exchanges without being spotted, and propose a comprehensive theory of market non-anonymity. Several novel results are established. They depend on asset value proprieties, beliefs, inter-temporal choices, and investors' characteristics. In equilibrium, under a regulation mandating public trade revelation, disclosures may shift prices. If they do, uninformed manipulations arise only in some instances. Specifically, insiders constrained on asset holdings earn more than they would without such a disclosure rule. Consequently, mandating disclosures is unnecessary, as informative trades will be revealed voluntarily. This result reveals a previously unexplored link to the literature on (uncertified/non-factual) announcements.
Key words: mandatory vs. voluntary public disclosure, securities regulation, insider trading, market manipulation
JEL Code: D82, G12, G14, G38

July 2012
Abstract: This paper investigates the bank lending channel of monetary transmission in Serbia. We collect individual bank balance sheet data for 33 banks over the period 2008Q3-2011Q2 and employ dynamic panel estimation techniques. Two different bank loan supply functions are investigated according to the currency denomination of bank loans in Serbia. Our findings indicate that there is a significant bank lending channel through the domestic and foreign reference interest rates in the growth of domestic currency loans. In the case of foreign currency loans, there is no statistical evidence for the existence of a bank lending channel which may be related to the prevalence of long-term loans in total foreign currency loans and relatively short sample size.
Key words: bank lending channel, Serbia, euroised economy, small-size dynamic panel estimation
JEL Code: Е52, Е58, C33

July 2012
Abstract: This paper investigates the short to medium-term empirical relationships between the current account balances and a broad set of macroeconomic determinants in Serbia and selected CEE countries. Using novel model averaging techniques we focus the analysis to individual country’s data only. The results suggest that the model tracks the current account movements over the past decade quite well and captures its relative volatility. Signs and magnitudes of different coefficients indicate significant heterogeneity among countries providing empirical support for the country-level analysis.
Key words: Current account, Model averaging, Transition countries
JEL Code: F32

July 2012
Abstract: This paper aims to reassess the contribution of the Balassa-Samuelson effect to the inflation and real exchange rate appreciation using panel data for nine CEECs covering the period ranging from the mid-1990s to the third quarter of 2010. The main idea of this analysis is to answer the question of whether the Global Economic Crisis had a significant impact on the efforts of CEECs to stay on the path of real convergence. The Balassa-Samuelson effect explains less than 1.5 percentage points on average of inflation differential relative to the euro area and around 1 percentage point of the total domestic inflation. The results are robust across the model specification and estimation method. Most of the results point out that the Balassa-Samuelson effect has not changed considerably during the crisis even though it is lower compared to that in the earlier stage of transition (for the period up to 2004).
Key words: Baumol-Bowen effect, Balassa-Samuelson effect, real appreciation, inflation
JEL Code: C23, E31, F31, F36, O11, O40, O52

July 2012
Abstract: How did the Subprime Crisis, a problem in a small corner of U.S. financial markets, affect the entire global banking system? To shed light on this question we use principal components analysis to identify common factors in the movement of banks.credit default swap spreads. We find that fortunes of international banks rise and fall together even in normal times along with short-term global economic prospects. But the importance of common factors rose steadily to exceptional levels from the outbreak of the Subprime Crisis to past the rescue of Bear Stearns, reflecting a diffuse sense that funding and credit risk was increasing. Following the failure of Lehman Brothers, the interdependencies briefly increased to a new high, before they fell back to the pre-Lehman elevated levels .but now they more clearly reflected heightened funding and counterparty risk. After Lehman’s failure, the prospect of global recession became imminent, auguring the further deterioration of banks loan portfolios. At this point the entire global financial system had become infected.
Key words: subprime crisis, credit default swap, common factors
JEL Code: G10, F3

May 2012
Abstract: Using the simulation-based approach, this paper aims to investigate the influence of operational problems which occur at two most important prticipants on the system as a whole as well as on the other participants of the payment system of the National Bank of Serbia. To the best of our knowledge, this is the first paper which examines, by use of simulations, the consequences of operational problems ocurring at the participants of the payment system of the National Bank of Serbia. Two scenarios were examined. In the first scenario, the most important participant is facing operational problems, while in the second scenario operational problems at two most important participants were supposed. Restrictively designed scenarios show that operational problems at the most important participants can seriously affect other participants' ability to settle their payments. In addition, in order to capture possible behavioral reactions by other participants, we investigate whether the application of the stop-sending rule can reduce the magnitude of contagion. We find that the application of this rule can substantially reduce the effects of the operational problems. However, the rule also reduces the number of transactions in the system as well as the total turnover. At the end, we determined the probabilty of defaults for each account used in our analysis.
Key words: simulations, payment system, operational risk, stop-sending rule
JEL Code: C15, G28

July 2011
The paper was selected the best paper at the First Annual Conference of Young Serbian Economists, held in the NBS from 22 to 23 June 2011.

Abstract: This paper analyzes the role of product quality and labor efficiency in shaping the trade patterns and trade intensities within and across two groups of countries, the developed and richer North and the developing South. Recent empirical literature identifies a positive relation between income per capita and both export and import prices, and also the import prices conditional on exporter. Instead of relying on specific demand side mechanisms such as non-homothetic preferences, we focus on the North-South differences in technology in a four country North-South trade model with two dimensions of firm het- erogeneity. Differences in firms’ product qualities and cost efficiencies result in a price distribution generating different consumption bundles and the observed export and import prices across rich and poor countries. Furthermore, the resulting total expenditure allocation across quality shows that the North (South) spends a larger share of its income on high (low) quality even with the same homothetic preferences across regions.
Key words: International trade patterns, North-South trade, import and export prices, heterogeneous firms, product quality
JEL Code: F10, F12, F14, L11, L15

* European University Institute, Italy.
** Uppsala University, Department of Economics, Sweden.

May 2011
Abstract: This paper studies drivers of daily dynamics of the nominal dinar-euro exchange rate from September 2006 to June 2010. Using a novel semiparametric approach we are able to incorporate the evidence of nonlinearities under very weak assumptions on the underlying data generating process. We identify several factors influencing daily exchange rate returns whose importance varies over time. In the period preceeding the financial crisis, information in past returns, changes in households’ foreign currency savings and banks' net purchases of foreign currency are the most significant factors. From September 2008 onwards other factors related to changes in country's risk and the information processing in the market gain importance. NBS interventions are found to be effective with a time delay.
Key words: Foreign exchange market; Partially linear model; Kernel estimation
JEL Code: F31, C14, G18

December 2010
Abstract: Medium-term projections are an important element of the decision-making process in an inflation targeting regime, that the National Bank of Serbia has been implementing for the past several years. The main goal of medium-term projections is to give an answer to what should be the policy rate path that would ensure that inflation in the coming period moves close to the targeted inflation rate. The most important tool for medium-term projections is a macroeconomic model, which is a set of equations aiming to describe the price-formation mechanism in Serbia and the transmission channel of monetary policy to prices. The model is comprised of four main behavioral equations for inflation, exchange rate, output gap and policy rate, and of a number of side behavioral equations and identities. For estimating trends and gaps on history, we use multivariate Kalman filter. The model in the current form has been used since end-2008 and is subject to regular adjustments and improvements.
Key words: medium-term projection model, inflation targeting, Kalman filter
JEL Code:C53, E17, E58

September 2008
Abstract: Motivated by the theory that suggests that Serbian exporters bear a burden of “strong” dinar, this paper investigates the relationship between exchange rate and foreign trade. The contribution of this paper is the estimate of the long-run impact of exchange rate on exports and imports for several industry groups. The estimated elasticity of exports with respect to real exchange rate is about 0.5, suggesting that the potential changes in the exchange rate policy would yield relatively small benefits for exporters. On the other hand, long-run relationship of imports and the exchange rate is not confirmed, while the aggregate wages, salaries, and pensions have the strongest effect on imports in the long run.
Key words: exchange rate, imports, exports

September 2008
Abstract: This paper investigates the efficiency of monetary policy in Serbia, а highly dollarized economy. Results suggest that the interest rate channel is shaded, and that it is dependent on the degree of dollarization. Interest rate movements are primarily determined by the movement of interest rates in the Euro zone. The impact the 2W repo rate of NBS on the lending interest rates becomes significant only after we control for the level of dollarization. The pass-through of 2W repo rate to interest rates is observed only when the dollarization falls below 64.5%. Maximum potential pass-through of 2W repo rate to interest rates (achieved at zero dollarization) is between 0.169 and 0.820, depending on the model specification.
Key words: rates, transmission mechanism, dollarization
JEL Code: E58, E43, G21

July 2008
Abstract: A new data set from the transition economies shows that the private sector has increasing access to long-term bank financing. In several transition countries credit has similar maturity structure to that in Western Europe, while in other transition countries credit remains mostly short-term. Several factors explain these differences: the political and institutional environment, bank privatization, sustained low inflation, the levels of economic and financial development, and the establishment of credit information sharing institutions. In contrast, the share of foreign owned banks and banking sector competition have no influence on credit maturity.
Key words: development, credit maturity, liquidity, transition economies
JEL Code: G21, O16, P34

May 2008
Abstract: We investigate a new data set on the maturity of bank credit to the private sector in 74 countries. We show that credit maturity is longer in countries with strong institutions, low inflation, large financial markets, and where banks share information about borrowers. Furthermore, we extend the finance and growth literature by showing that credit maturity matters for economic growth. Economic growth is enhanced in countries where agents have access to long-term financing. Therefore, weak institutions, high inflation and other variables that reduce credit maturity have an impact on economic growth via their influence on credit maturity. The estimated effects are substantial in size.
Key words: financial development, economic growth, credit maturity, liquidity
JEL Code: G21, O40, O16, O43

March 2008
Abstract: This paper analyzes the effects of different monetary policy transmiss ion channels in Serbia as well as their implications for the current monetary policy framework and instruments. It has become apparent that, for the time being there are two active channels: the exchange rate channel and the expectations channel. Although the effect of transmission of the exchange rate on prices is dominant, the central bank is determined to conduct its monetary policy within the framework of an inflation targeting monetary strategy. In the future, other channels -primarily the interest rate and credit channels – are expected to become active as well. However, it should be said that the use of administrative measures has so far not been efficient in strengthening these channels. The Conclusion of the paper draws attention to the difficulties faced by monetary policymakers in the absence of support from other policies, especially fiscal policy.
Key words: Monetary transmission, Monetary Strategy, Inflation Objectives, Balance- of Payments Objectives, Administrative Measures and Fiscal Policy

The paper was published in the Quarterly monitor of economic trends and policies in Serbia n. 11 Octobar –Decembar 2007.

March 2008
Abstract: This paper investigates macroeconomic implications of using reserve requirements as a monetary policy instrument. The result suggests that reserve requirement has not been an efficient instrument. We derive this broad conclusion as this instrument does not have expected effect on the credit activity of commercial banks. Furthermore, reserve requirements increases private foreign debt, while the impact on the foreign liabilities is not statistically significant. In contrast to reserve requirements, 2-weeks repo rate of NBS decreases private foreign debt, and this impact is statistically significant. Core and headline inflations are determined by the exchange rate movements, while the direct effect of reserve requirements and NBS interest rate is not confirmed.
Key words: Reserve requirements, credit, foreign debt, inflation.
JEL Code: E31, F34, E58

February 2008
Abstract: This paper estimates the pass-through effect of the exchange rate to prices in Serbia. Results obtained using ADL and VAR methodology suggest that the effect of exchange rate to inflation is Serbia is relatively high, but, as it is the case in most countries and previous studies on Serbia, incomplete and well below one. The estimate of the passthrough effect obtained using ADL methodology is between 0.13 and 0.31 in the short-run, and between 0.19 and 0.50 in the long-run. During the depreciation of the domestic currency (against the nominal effective exchange rate constructed from euro and U.S. dollar) the effect is considerably higher, and it reaches even 0.90 when we look at the retail price index.
Key words: pass-through effect, exchange rate, inflation, depreciation
JEL Code: E50, F31, E31

December 2007
Abstract: As part of preparations for the adoption of a full-fledged inflation targeting regime, last year the National Bank of Serbia began producing and publishing its inflation projections. The NBS Monetary Policy Committee opted for projections based on the key policy rate path. However, for the time being, information on the path of the key policy rate (and the exchange rate) is not publicly disclosed. The author compares this approach to a number of different practical solutions applied by other central banks to give an overview on this particular issue and to consider the ways to improve the NBS practice in order to increase the efficiency of inflation expectations management as the inflation targeting regime is further developed.
Key words: inflation projections, assumptions in inflation projections, key policy rate in inflation projections, communication with the public

December 2007
Abstract: The paper gives an overview of the main features of credit growth in transition economies, with special emphasis on developments in Serbia. It aims to evaluate the current pace of credit growth and its potential adverse impact on macroeconomic stability.
Findings of the analysis indicate that, despite strong growth in lending to the private sector, Serbia is not experiencing a credit boom, as high figures are mainly attributable to the convergence process and low starting point at the outset of transition. This implies scope for further expansion in lending.
Key words: credit growth, credit boom, convergence trend

December 2007
Abstract: Theory provides more then one explanation of both the manner and mechanisms of fiscal policy impact on inflation. Opting for a particular explanation is further complicated by the specific features of fiscal policy currently implemented in Serbia. This paper aims to recognize the effects and transmission mechanisms of fiscal policy currently in place in Serbia, which would help introduce the fiscal policy variable into the DSGE model used for monetary policy purposes.
Key words: fiscal policy, mechanisams, effects, Serbia

June 2007
Abstract: The paper analyzes the relationship between the privatization receipts and fiscal deficit in Serbia from 2002 to 2007. The empirical study incorporates monthly data series, where findings suggest that the privatization receipts have caused an increase in the country’s budgetary deficit and expenditure, and have thus endangered the long term fiscal position of Serbia. Change in use of privatization receipts is necessary if the fiscal balance is to be kept on track over the longer term. The paper suggests that the privatization receipts should be used for capital investment under conditions of sustained price stability. In case of inflation-related problems, these funds should alternatively be used for repayment of foreign debt. It is also advisable to adopt a methodology for budget presentation which is more transparent with regards to the use of privatization receipts.
Key words: privatization receipts, budget deficit, debt repayment

December 2007
Abstract: This analysis aims to quantify features of exchange rate pass-through to inflation for Serbian economy. In summary of our results, ADL and recursive VAR methodologies confirm that pass-through effect in Serbia is relatively high, but, like in most countries, incomplete and well below one. Although, the estimates are very imprecise and range from 0.3 to 0.7, depending on the specification and sample size, the thrust our results suggests that the short term pass-through elasticity is less than 0.3 and the long run elasticity is less than 0.6.
Key words: pass-through effect, exchange rate, inflation

May 2006
Abstract: Grants and remittances tend to insulate beneficiary countries from movements in the world market, hence enabling them to build up foreign exchange reserves irrespective of their competitiveness, i.e. performance of their economies. Initial effects of these types of transfer manifest primarily as the appreciation of the exchange rate and an increase in labor costs, while the effect of remittances on wage levels is twofold. Indirect effects are manifest above all in terms of the volume and composition of investment and exports. In case of the former, it is important to sterilize monetary effects, while in the latter case it is important to avoid any investment-related decision-making based on signals of temporary character. Majority of empirically found effects of grants on economic growth are rather negative than positive. The same, though to a lesser extent, also applies to remittances. As the volume and growth rate of remittances in Serbia are higher than those of grants, in addition to their stabilizing and social function, they should also acquire a significant investment function.

December 2005
Abstract: Sterilization is one of the ways to prevent automatic spill over of the effects of interventions in the foreign exchange market on the money supply. The effectiveness of sterilization can be examined by applying the concept of sterilization coefficient, off-set coefficient and neutralization coefficient.
Empirical analysis of the sterilization, off-set and neutralization coefficients was made with a view to ascertaining the extent to which the National Bank of Serbia’s sterilization policy managed to neutralize the effect of reserve money creation through net foreign exchange transactions. Another purpose of this analysis was to assess the government’s contribution to sterilization, as well as the impact of sterilization-related monetary policy measures on foreign borrowing by banks.

April 2005
Abstract: The aim of the present paper is to assess stability of the money demand function in the Republic of Serbia and provide an empirical analysis of factors that influence money demand. The modeling was based on the standard approach that the money demand relative to the economic activity and opportunity cost of the money stocking,whereas the industrial production index was applied as the indicator of economic activity.Economic analysis of the money demand function was facilitated by the Johanes’ procedure and error-correction model with the main objective to determine the factors which, in both short- and long-term, influence its movements. The results show that money demand in the entire period under review showed signs of instability and could not be used for the purpose of targeting monetary aggregates.
Key words: money demand, error-correction model, Jonhanes’ procedure.

March 2005
Abstract: Monetary conditions index (MCI) is an indicator of the combined effect of short-term interest rates and the exchange rate on price stability and/or aggregate demand. The MCI enables monitoring of changes in the level of restrictiveness and/or expansiveness of monetary policy compared to the base period. It enables us to observe the impact of monetary conditions on the general level of prices and inflation process.
Depending on the circumstances, MCI can be construed by calculating weights to account for the relative effect of the exchange rate and interest rates on either aggregate demand or prices. As inflation expectations in Serbia strengthened in the prior period, the authors agreed to construe the MCI so as to account for the relative effect of the exchange rate and interest rates on price levels.
Empirical analysis of MCI movements shows that there was a relaxation in the monetary policy stance in late 2004 and early 2005. Indirect measures of monetary regulation are still ineffective in our country. Changes in reserve requirements, as the most frequently used monetary policy instrument in the prior period, did not always lead to the results expected. In this context, the authors argue that the role of interest rate as an instrument of monetary policy should be strengthened in the coming period, as well as the use of other indirect instruments of monetary regulation.

June 2004
Abstract: Serbia will in the coming years allocate substantial amounts for the servicing of external debt which has reached around USD 14 billion. Based on various criteria of indebtedness, the study explains whether Serbia is a severely indebted country and whether its external debt is sustainable, i.e. can Serbia and under what conditions service its external debt in an unimpeded way.

December 2004