Testing the monetary trilemma theory on the example of Serbia

Abstract

Monetary trilemma (MT) is an economic concept based on the idea that a country cannot concurrently have exchange rate stability, free capital flows and monetary independence, which is why it has to choose two of these three available options. The purpose of this article is to determine the validity of the MT hypothesis in Serbia, in the period from 2006 to 2022. After constructing the MT measures, the article approaches to multiple linear regression with the aim of establishing the binding relations among these variables. Serbia has a stable exchange rate policy and extensive capital flow controls, as well as monetary independence that could be much greater. Serbia appears to have voluntarily given up its monetary autonomy in favour of its exchange rate stability and financial closure. The originality of this article stems from the novel approach to this issues, being informative for domestic policy makers in their further policy considerations.