Econometric Modeling and Forecasting of Interest Rates in Montenegro
Econometric Modeling and Forecasting of Interest Rates in Montenegro

Summary/Abstract: The econometric modelling and forecasting have a growing importance in both the development of modern models and theoretical approaches and as bases for proper policy decision making. This paper investigates the possibility of applying the Box-Jenkins approach and vector autoregressive models in modelling and forecasting interest rates in Montenegro. The motivation for this research lies in the fact that the interest rate level is one of the key determinants of the Montenegrin economic development dynamic due to the specific characteristics of its financial market. The empirical analysis is done on the monthly values data of weighted average lending interest rate of banks on new loans in the period from December 2011 to January 2018. Our research has proven that the Box-Jenkins approach and VAR models can be successfully used for modelling and forecasting the interest rate level in the Montenegrin, quite a bank-centric, system. Moreover, the results recommend the use of the Box-Jenkins approach and the estimated AR model for forecasting interest rate since it has better performances than the VAR model. The estimated AR model may find its application in helping the decision-makers to create better economic policy decisions. Despite some limitations, regarding specifics of Montenegrin economy and statistical base, to a certain degree our results are in accordance with research done for other countries.

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