The Role of Monetary Policy as the Foundation of Economic Development in Bosnia and Herzegovina

By Zivkovic, Matej; Hodzic, Lejla | Journal of Economic and Social Studies, Spring 2016 | Go to article overview

The Role of Monetary Policy as the Foundation of Economic Development in Bosnia and Herzegovina


Zivkovic, Matej, Hodzic, Lejla, Journal of Economic and Social Studies


Introduction

Every country, in order to achieve macroeconomic stability, full employment and improved living standards for its citizens, faster economic growth and consequentially economic developmentneeds to conduct appropriate economic policy. Government has three instruments to achieve objectives of economic policies in a certain nation, namely investments, direct government and by state owned enterprises, as well as fiscal and monetary policy. An important part of every country's economic policy is therefore monetary policy, whose aim is, by influencing the availability of credit and cost, tostabilize the prices, exchange rate and amount of money in circulation, to control inflation and maintain equilibrium of balance of payments.

Monetary policy actions need to adjust to changes in the financial systems of countries, which happen regularly. Therefore, the model of managing the monetary policy has to be chosen with a lot of care.

The use, influence and objectives of monetary policy have changed in the aftermath of the global financial crises and consequent global recession. One of the heritages of the seventies was the fear of high inflation that devours the value of everything in a single economy. This fear was multiplied in countries of the region by hyperinflation of the eighties. The terror of inflation has the leftmuch of the world with the primary concern with general increase of prices for monetary policy. However global crises caused triggering the concept of easy money through what was later called monetary easing, with primary goal of revitalizing stumbled economic activities without any fear of overheating the economy with possible inflation. The paradigm has hence changed; monetary policy no longer targets levels of price at least not as its primary concern, but unemployment and other economic malaise produced by economic crises and attempts to assist together with other instruments of economic policy in achieving economic development.

The subject of this paper is the monetary policy and its instruments, especially in Bosnia and Herzegovina, and it being the potential for achieving economic development. Throughout the paper, the importance of Central Bank will be highlighted as it represents the pillar of monetary system and is the holder of monetary policy. The method which will be used to serve the aim of the paper is a combination of modelling method, inductive method and Delphi method. 26 Journal of Economic and Social Studies

Furthermore, the task of the paper is to address the Currency Board and to present possible changes in monetary policy that potentially could be the key to achieving faster growth and enabling the country to become economically stable.

Literature review

The topic of Currency Board Arrangement (CBA) has been used as a main research topic for many years, since many countries, at either same time or at different points in time, have experienced currency fluctuations and consequently financial instability and since currency boards have been existing for more than 150 years. The CBA was also the cover topic of most prominent economic newspapers, including The Economist. The most prominent study of currency boards was by Hanke and Schuler (1994) who provided with a comparison of currency boards versus central bank regime, highlighting benefits and disadvantages of each. Comparative statistics and formal econometric analysis of Gosh, Gulde and Wolf (1998) confirmed that, historically, currency board arrangements have achieved better performance and better results than any other fixed exchange rate regime (Fabris & Rodic, 2013). In addition, it has been found, through statistical and econometric analysis of Gulde, Julia and Keller in 2000, that the performance of inflation has been significantly better, meaning lower, and higher growth has been achieved under currency boards than under floating exchange rate regimes (Gulde, Julia, & Keller, 2000). …

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