INTEREST RATE PASS-THROUGH TO DEPOSIT INTEREST RATES IN A DUAL-CURRENCY MONETARY SYSTEM: THE CASE OF SERBIA

Since the financial system in Serbia is characterized by a high level of euroization, there are two distinct deposit interest rate pass-through processes at work: the domestic interest rate pass-through and the imported (cross-border) interest rate pass-through. The findings for the domestic interest rate pass-through imply that the long-term pass-through varies within a range below unity, so the pass-through from the interbank (money) market rate to deposit rates is incomplete; the evidence on the short-term pass-through is weak, and the speed of adjustment to the long-term equilibrium is relatively high. The imported interest rate pass-through shows the stronger evidence of cointegrating relationships across interest rates in comparison to the domestic interest rate pass-through, and very closely mimics the interest rate pass-through in the euro area in all relevant criteria. In effect, the findings show that the monetary policy in the euro area is integrated well with the domestic monetary policy in Serbia in terms of the cost adjustment of the deposit portion of banks’ liabilities. Overall, the findings show that the monetary policy in the euro area is integrated well with the domestic monetary policy in Serbia in terms of the cost adjustment of the deposit side of banks’ balance sheets stemming from the monetary policy decisions.