engleski

Central bank sterilization policy: the experiences of Slovenia and lessons for countries in Southeastern Europe

It is well known that countries in the Southeastern European (SEE) region have experienced a substantial and gradually intensified inflow of foreign capital during the entire period of economic transition (Markievicz, 2006). Central banks in those countries had to adapt their monetary policy operations and exchange rate regimes to the changing conditions. Especially in those countries that responded by implementing a managed floating exchange rate regime, central banks had to find viable solutions in order to support the “ consistency triangle” policy framework (Bofinger and Wollmershaeuser, 2001). Advocates of the “ consistency triangle” policy framework claim that simultaneous determination of the optimum interest rate level and the optimum exchange rate path is possible. Effective sterilization procedures need to be activated by the central bank in order for the policy framework to be operational. The experiences of some developing countries in the 1990s confirm the viability of sterilization as a key element of the central bank’ s monetary policy in circumstances of intensified inflow of foreign capital (Lee, 1996). However, certain limitations to this kind of strategy exist, which in most cases central banks need to address properly by developing alternative procedures and instruments instead of classical open-market operations. Namely, the use of classical openmarket operations does not happen to be a feasible strategy in most countries, since money markets and money market instruments in developing/transition economies are usually underdeveloped. In this paper we first review some sterilization practices and general characteristics of sterilization-based monetary policy approaches presented in the literature to date. The main objective of the paper is to elaborate sterilization practices implemented by Banka Slovenije in the period from the introduction of Slovenian tolar as the national currency at the beginning of the 1990s, till entry into the ERM2 mechanism and consequent adoption of the euro. The case of the Slovenian central bank is analysed in comparison to five central banks in countries of the SEE region, by using an approach based on decomposition of stylized central bank balance sheets. Some innovative approaches to sterilization operations conducted by Banka Slovenije could be employed in other countries in the SEE region, especially in those facing intensified foreign capital inflow. The rest of the paper is structured as follows: first, we give a brief overview of the general findings published so far regarding central banks’ sterilization practices in developing countries (section 2). In section 3 we discuss the relevance of sterilization policies for a select set comprising Slovenia and five SEE countries. This is followed by a more detailed presentation of Bank of Slovenia sterilization practices and lessons that can be drawn from Slovenian experiences (section 4). The paper concludes in section 5 with a summary of the main conclusions and findings.

the Balkan; Slovenia; banking; central banks; monetary policy; commercial banks; control

COBISS.SI-ID.17682662 Workshops no. 12/2007