The The role of inflation in creating the key policy rate – validation of Taylor's Rule in case of Serbia


Almir A Alihodžić Srđan Furtula Milan Kostić


Due to high inflation expectations, the National Bank of Serbia has chosen price stability as the primary objective of monetary policy and the key policy rate as the main instrument of monetary regulation. However, despite a clearly defined Taylor rule, the key policy rate does not always follow the movement of the rate of inflation. Accordingly, the aim of this study is to test the effects of inflation rate on the key policy rate and the possibility of using Taylor rule in the original conditions of low inflation. Based on the defined object of the research, we tested the following hypothesis: inflation rate had statistically significant impact on the key policy rate in the whole analyzed period, between 2007 and 2015. The same observation was tested for two sub-periods between 2007 and 2011 and between 2012 and 2015. Therefore, it can be concluded that there is statistically significant moderate impact of inflation rate on the key policy rate, but representativeness of the model could be higher. The lack of reaction of the key policy rate to inflation stresses the need for redefining monetary policy instruments and modifying the strategy of inflation targeting.

Palabras clave

Inflation, Key policy rate, Monetary policy, Taylor rule.



Benazić, M, Tomić, D. (2014) “The evaluation of fiscal and monetary policy in Croatia over a business cycle”, Zbornik radova Ekonomskog fakulteta u Rijeci, vol. 32 , sv. 1 , 75-99

Bivens, J. (2014) “Tightening monetary policy now is a bad mistake”, Challenge, vol. 57, no. 6, November/December 2014, pp. 5–22., DOI: 10.2753/0577-5132570601

Chadha, J.S, Turner, P., Zampolli, F. (2013) “The ties that bind: monetary policy and government debt management”, Oxford Review of Economic Policy, Volume 29, Number 3, 2013, pp. 548–581, DOI:10.1093/oxrep/grt030

Di Giorgio, G., (2014) “Monetary policy challenges: how central banks changed their modus operandi”, Eurasian Econ Rev (2014) 4:25–43, DOI: 10.1007/s40822-014-0002-5

Goodhart, Charles A.E. (2013) „The potential instruments of monetary policy”, Central bank review, Turkey, Vol. 13, pp 1.

Hofmann, B. Bogdanova, B., (2012) „Taylor rules and monetary policy: a global „great deviation“, BIS Quarterly Review, 37-39.

Furtula, S. (2008) “Referentna kamatna stopa Narodne banke Srbije kao instrument regulisanja inflacije”, Bankarstvo, Udruženje banaka Srbije, Beograd, br. 11-12, 68-76.

Jevđović, G. (2014) „Investigating the Efficiency of Monetary Transmission Channels in Serbia”, Industrija, Vol.42, No.2, DOI: 10.5937/industrija42-6099

Mitchell, K, Pearce K. D. (2010) Do Wall Street economists believe in Okun’s Law and the Taylor Rule? Journal of Economics and Finanance, Springer, 34, 196–217, DOI 10.1007/s12197-009-9085-3

Molodtsova, T., Nikolsko-Rzhevskyy, A., Papell, D. H. (2011) “Taylor rules and the euro”, Journal of Money, Credit and Banking, Vol. 43, No. 2–3 (March–April 2011), p. 536. DOI: 10.1111/j.1538-4616.2011.00384.x

Nekipelov, A., Golovnin, M. (2010) “Strategy and Tactics of Monetary Policy in Conditions of the Global Economic Crisis”, Problems of Economic Transition, vol. 53, no. 3, July 2010, pp. 5–25. DOI 10.2753/PET1061-1991530301

Ormerod,P., Rosewell, B. and Phelps P. (2013) Inflation/unemployment regimes and the instability of the Phillips curve, Applied Economics, 2013, 45, 1519–1531, Routledge

Svensson., L. (2015) “The Possible Unemployment Cost of Average Inflation below a Credible Target”, American Economic Journal: Macroeconomics, 7(1): 258–296

Taylor, J. B. (1999) Monetary policy rules, University of Chicago Press

Taylor, J. B. (1993) „Discretion versus policy rules in practice“, Carnegie-Rochester, Conference Series on Public Policy 39, 195-214.

Narodna banka Srbije, Statistika, Available at:> [Accessed: June 23, 2017]

Narodna banka Srbije (2007) Izveštaj o inflaciji – prvo tromesečije, Available at, [Accessed: June 29, 2017]