The monetary policy cycle in Bosnia and Herzegovina

Given that the Central Bank of Bosnia and Herzegovina does not have the legal authority to lend to residents, the country's monetary regime is deprived of a reference interest rate. Therefore, we approximated the monetary policy cycle in Bosnia and Herzegovina by using the ratio between the monetary aggregate M2 and gross domestic product. In this paper, we demonstrated the high persistence of the monetary cycle, confirmed its dependence on base money, and included in our analysis the interest rate differential between foreign and domestic rates, as well as the financial cycle. A significant portion of monetary conditions is shaped by domestic banks, which create secondary deposits through deposit-credit multiplication, thereby confirming the endogenous theory of money. As expected, the monetary cycle is also influenced by the interest rate differential, with this relationship being inverse. In order to increase the liquidity of the economy, that is, the value of the monetary cycle, we recommend implementing a policy of monetary regulation. This would include limiting the exposure of BH banks to foreign markets, while simultaneously introducing a negative fee on excess reserves held by banks at the Central Bank of Bosnia and Herzegovina.