Reserve requirement as a monetary regulation instrument – Bosnia and Herzegovina experience
Reserve requirement as a monetary regulation instrument – Bosnia and Herzegovina experience

Summary/Abstract: As a young and open economy with a war burden, Bosnia and Herzegovina, encouraged by the international community, opted for a monetary policy based on the currency board principle. The currency board system is established on a monetary/foreign currency institution which, at a permanently fixed exchange rate, maintains full convertibility of the local currency. This choice seems to be correct having in mind the past of this region in terms of monetary institutions and the money management which often caused hyperinfl ation, which further impoverished the whole population of Bosnia and Herzegovina. In this type of monetary organization, the only instrument of the monetary policy is the cash reserve ratio. With the emergence of the global crisis, the Managing Board of the Central Bank of Bosnia and Herzegovina tried, by frequently changing the cash reserve ratio, to influence the financial sector liquidity and adjust the loan supply. Therefore, this paper aims to ascertain to which extent the cash reserve ratio is an efficient instrument of transmission and how much it can infl uence the lending to the economy and population i.e. the increase or decrease in the banking system liquidity. The results of our analysis demonstrate that reserve requirements have not proven an effi cient instrument of monetary regulation except in terms of improving the banking sector liquidity.

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