nbs has a limited impact on the real exchange rate in the longer run, and can have a significant influence only in the short run. adoption of alternative exchange rate regimes cannot resolve the problem of the real exchange rate. it is, of course, my intention to also tackle on this occasion the other aspect of macroeconomic policy – fiscal policy. it deals with tax revenue which the state can extract from the economy and the amount of money it must spend. i do not wish to debate here the optimum size of the public sector, though it is only natural that i should have an opinion on that matter. i wish to underline, however, that changes in fiscal policy have very important implications on monetary policy, real interest rate and the real exchange rate as specified by the government in both the budget and the memorandum on economic policy for 2008 - 2010. hence comes my fourth message that monetary policy can be applied to keep inflation under control at low and stable level, but how tight should such policy be to achieve its aim, depends to a large extent on fiscal policy, too. the increase in public spending that is not covered by an increase in regular public receipts, or a significant reduction in tax receipts without comparable reduction in public spending, shall have its implications on the level of interest rates and the exchange rate for the dinar. i think that many exporters are aware of the significance of this dependence. my fifth message is that an exporter - friendly macroeconomic environment assumes low rate of inflation, gradual decrease in real interest rates and implementation of responsible fiscal policy. however, these can provide only indirect help in view of the reality facing the ever increasing number of exporters. the fact is that, in the longer run, world prices are falling in real terms. it is a long - term trend, of course, and has nothing to do with macroeconomic policy. improvement in productivity, product quality adjustments to market requirements and better marketing are at least as important as macroeconomic policy. these are the real challenges facing the exports sector worldwide! my sixth and final message is that the role of the nbs is not to hermetically isolate serbia from exchange rate changes coming from abroad but to secure conditions that would protect the economy from such risks. the price of oil has been continually increasing since the beginning of the year, prices of metals are several times higher now than few years ago, electricity prices are three times higher now than on the onset of transition. “ market is merciless place and carries

in recent months, expectations have remained far from the objective of price stability ; they increased slightly in the spring, but then turned down again. the governing council deemed it necessary to respond promptly to the worsening economic situation, in order to reiterate its intention to confront weakening aggregate demand and its effects on prices, to not fall behind the curve and to counter low inflation expectations with determination. the global financial crisis and the sovereign debt crisis have taught us that in these circumstances excessive prudence is counterproductive : by not responding swiftly to the risks of too low inflation for too long, a lengthier and more incisive measure, which carries greater risks of unintended side effects, is then needed to counter the risk of deflation. 3. there was extensive discussion in the governing council on the decisions and measures to introduce ; of course, opinions varied and some reservations were expressed regarding certain individual instruments and some of their characteristics. the package of measures adopted received the approval of a majority of the members of the governing council. the analyses conducted by the bank of italy indicate that there is no reason to doubt their overall effectiveness. in the current circumstances, uncertainty about the effects of the individual instruments is naturally widespread, but our analyses suggest that the purchase programme is, in the present conditions, the most effective instrument ( aside from being the most “ conventional ” one, given that open market operations have always featured in central bankers ’ “ toolbox ” ). our estimates suggest that the impact of the new purchases on economic activity and on inflation, through the contraction of term premia and the transmission to the yields of all financial assets, can be much bigger today than that of a cut in the official rates. from a conceptual and empirical perspective, there is no reason to rule out the possibility of further contractions in term premia, which in any event had already occurred with the consolidation of expectations of the new measures. as i have often observed, the effects of a reduction in official rates to negative values – the truly “ unconventional ” instrument among those introduced so far by the governing council – are surrounded by greater uncertainty. we estimate that so far, the cuts in the reference rates have had significant expansionary effects ; down the road, however, their effectiveness could prove more doubtful, especially in view of the downwards rigidity of interest rates on deposits. in any event, it should not be forgotten that the persistence of negative nominal interest rates across a broad spectrum of maturities for lengthy periods cannot be attributed solely