Impact of Dollarization on Channels of Monetary Policy

This study investigates historical development of dollarization in Serbia and its current impact on channels of monetary policy. Using structural vector autoregression model based on monthly data on Serbian economy from 2005 to 2016 we find that monetary policy in Serbia has very little impact on real activity, whereas price level is determined mainly by exchange rate channel. Interest rate channel is not operative because price level in Serbia is more influenced by amount of foreign deposits over which National Bank of Serbia has little control than by volume of Dinars in circulation. The most important determinant of structure of money holdings (Dinars vs. foreign currency) is interest rate in Euro Area.