After Years of Criticism, the Role of Central Banks Has Only Been Affirmed in Crisis

Only in the past five years, due to a severe economic crisis, the central banking profession has received the affirmation it deserved after years of unjustified academic criticism.

This message was sent from the ‘Meeting of Governors of the Region’ which gathered the governors of the central banks of Croatia, Slovenia, North Macedonia, Montenegro, and Bosnia and Herzegovina in Rovinj. The aim of the meeting, organized by the business weekly Lider and Business Info Group, is to discuss measures in the fight against the global crisis and the relationship between commercial banks and central banks.

Velimir Šonje, director of Arhivanalitika, raised the issue of the deficit of monetary policy instruments and the shifting of responsibilities. Šonje noted that central banking was much simpler 15 years ago than it is today. However, even then, the central banking profession began to understand the differences in conducting monetary policy in small and open countries versus large and closed economies. The crisis, in his opinion, has further complicated matters in the last five years. The role of central banks has only been affirmed in crisis after years of academic criticism, which was mostly based on uncritical copying of textbook models.

– In the crisis, large central banks implemented quantitative easing after realizing that lowering interest rates had no effect. People today do not understand how banks managed to increase their balances two or three times without an increase in inflation, so many in small and open economies wonder if they can do the same. Theoretically, this would be possible if the transmission mechanism worked, i.e., if the money supplied was converted into loans and investments, says Šonje.

According to specific economic indicators, Šonje states that Croatia is the biggest loser of this crisis, while North Macedonia is the only winner in the region, having jumped about ten places on the Doing Business list. What is interesting is that Croatia and Slovenia are in contraction, experiencing capital outflows, while other regional countries have inflows. The growth model has remained the same, which better suits the smaller countries of Southeast Europe. Inflation is low everywhere, except in Serbia, where there has been experimentation with the exchange rate.

Dimitar Bogov, governor of the National Bank of North Macedonia, explained that the local economy has grown considerably during the crisis, but warned that North Macedonia started from the weakest position.

– At the beginning of the crisis, North Macedonia was heavily affected by capital outflows, but through a series of measures and careful management of the reference interest rate, the situation quickly stabilized. The engines of growth in North Macedonia are new foreign companies and the intensive work of the government, which is making every effort to attract foreign investors, said Bogov.