Foreign exchange rate as a factor to improve the business environment – the case of Serbia

Domazet, Ivana and Lazić, Milena and Hanić, Hasan (2014) Foreign exchange rate as a factor to improve the business environment – the case of Serbia. In: Contemporary trends and prospects of economic recovery. CEMAFI International Association, Nice, pp. 395-410. ISBN 978-2-9544508-5-8

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Abstract

Foreign exchange rate represents an important determinant of the economic policy of each country. The exchange rate affects inflation and balance of payments, economic profitability and social status of the population. Foreign exchange rate is an instrument by which a country can affect the export competitiveness, while by stability of the national currency it may create a favorable macroeconomic environment and thus encourage the inflow of foreign capital. For countries facing inflation, a fixed exchange rate is potentially a more appropriate solution. On the other hand, for countries facing impaired trade balance and slow economic growth, perhaps the best suited decision is the implementation of a more flexible foreign currency-exchange arrangement, while intermediate regimes may provide significant benefits – since they encompass positive aspects of both extremes at the same time avoiding many of the costs. However, the survey results show that the proportion of countries adopting intermediate regimes was reduced either in favor of greater flexibility, or in favor of greater rigidity. Hence, this paper analyzes the basic characteristics of the current exchange rate regimes, and the implications of a managed floating exchange rate application on the success of the Serbian economy.

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