Index of Monetary Conditions in Bosnia and Herzegovina

Abstract

Abstract The main goal of the research was measuring of the monetary conditions in Bosnia and Herzegovina (BH). By using multiple linear regression, Monetary Conditions Index (MCI) is constructed for the first time for BH. Monetary conditions are measured in relation to the industrial production. Monetary conditions in BH compared to the period before the beginning of the global economic crisis have been improved. Both MCIs show significant improvement in the monetary conditions measured by the movement of interest rates, real effective exchange rate and credit growth. The highest interdependence in the movement with the growth rate of industrial production shows MCI constructed on the basis of the implicit active interest rate (as an approximation for the domestic reference interest rate, i.e. a channel of interest rates) and the rate of credit growth. The interest rate channel in BH is not dominant in relation to the exchange rate channel. The reason is the lack of the central bank loan and therefore the absence of the reference interest rates. MCI ratio (ratio between coefficient with implicit active interest rate and coefficient with REER) is 1.09. By this research the benchmark values of MCI for BH are set. Established MCI is starting point for further measurement of monetary conditions in BH. .