CONCEPT OF CENTRAL BANK INDEPENDENCE AND LEGAL STATUS OF THE NATIONAL BANK OF SERBIA

Savremena teorijska koncepcija samostalnosti centralne banke od ključnog je značaja za formiranje institucionalnih aranžmana koji se odnose na monetarnu vlast. Teorijski je utvrđeno i empirijski verifikovano da centralna banka može da funkcioniše efikasno samo ukoliko je obezbeđena njena institucionalna samostalnost. U prvom delu rada je izložena savremena teorijska koncepcija samostalnosti, dok se u drugom delu rada razmatraju pozitivni pravni propisi kojima je definisan institucionalni okvir i pravni status Narodne banke Srbije. Poređenjem formalnog i faktičkog statusa koji trenutno uživa Narodna banka Srbije sa institucionalnim aranžmanima koji su rezultat praktične primene teorijske koncepcije samostalnosti, autor je zauzeo kritički stav prema domaćem institucionalnom okviru. Adekvatna zakonska rešenja su istaknuta u radu, a istovremeno su predložene i odgovarajuće izmene onih rešenja koja nedvosmisleno narušavaju institucionalnu samostalnost Narodne banke Srbije.


Introduction
The theoretical concept of independence has largely shaped the modern institutional frameworks relating to the central bank. Owing to the theoretical and empirical research, which points out to the important role of the central bank in the developed market economies, a significant number of states adopted the new legislation which allows the formation of better institutional frameworks. According to Cukierman (1996), twenty five states substantially improved the independence of their own central banks only in the period from 1989 to 1996.
In order to fully understand the modern theoretical concept of central bank independence, it is necessary to analyze its roots, i.e. to analyze the most important findings based on which this concept was formed by applying the knowledge of economic history. This approach also includes the specific consideration of the numerous aspects of central bank institutional independence, such as the political, personal and financial aspects.
The aim of this paper is to determine the current status of the National Bank of Serbia (the NBS), based on the modern theoretical concept of central bank independence and applicable legislation relating to the NBS. The fulfillment of the declared aim also includes a consideration of whether, and to what extent, there is a discrepancy between the established formal and de facto independence. The conclusions drawn at the end of the paper will serve as a basis for an indication of possible shortcomings in the applicable legislation of the Republic of Serbia and formulation of proposals for the appropriate amendments.

Historical Development of the Theoretical Concept of Central Bank Independence
The inception of the theoretical concept of central bank independence is mainly linked to the contribution to the reference literature from the early 80th of the last century (Barro and Gordon, 1983), which to some extent relies on the previous works (Kydland and Prescott, 1977), but also introduces an entirely new idea of monetary authority, which controls inflation and maximizes the total social welfare. The objectives of such monetary authority may be defined through the employment (production) and inflation, while the employment and inflation rate variations in comparison to the planned objectives generate the loss function. Barro and Gordon noted that all entities adjust to the monetary policy of the central bank, not ex post but ex ante, by predicting the certain measures of the central bank. Thus, ex ante the optimal monetary policy requires zero inflation, while ex post only the positive inflation rate implies the maximization of the monetary authority's income. Therefore, the strong inflationary tendencies have been noted in the sole behavior of the central bank. In order to solve the mentioned problem and avoid the positive inflation rate, which causes the loss of social welfare, it was necessary to establish a suitable legal, economic and political mechanism that would serve as a guarantee for the implementation of a stable non-inflationary policy by the monetary authorities. Rogoff (1985) was among the first to propose one such mechanism: it implied that a conservative person, i.e. a person whose preferences are publicly known and substantially different from the preferences previously expressed by the monetary authority, is to be appointed as head of the central bank. Such a person somewhat more values the avoidance of inflation in comparison to the avoidance of unemployment, which results in a lower inflation rate, and all in accordance with the marginal costs and benefits from the inflation that this person enjoys. Bearing in mind that these preferences are known, not only the actual inflation rate in a state would be lower, but also the expected one. At the first glance, the optimal solution, which is in the economic theory known under the abbreviated name "conservative banker", could significantly help in reducing the central bank's inflationary tendencies. However, as Rogoff (1985) himself pointed out, the proposed solution may not be perfect in the world with many stochastic shocks, since there are in reality certain stabilization rules for conducting the monetary policy, which would be rather weak in case of the conservative banker. This means that the desired lower inflation rate comes along with Ilić N. Theoretical concept of central bank independence and legal status of the National bank of Serbia najvećoj meri i stvaraju problem. Naime, kada bi svi faktori proizvodnje bili angažovani, ne bi bilo ni potrebe za dalje podsticanje rasta proizvodnje i zaposlenosti. Međutim, treba istaći i da pojedini autori izražavaju sumnju da uopšte može postojati takav institucionalni okvir koji bi podsticao centralnu banku na vođenje monetarne politike koja podrazumeva nultu stopu inflacije (Blinder, 1999).
In fact, if all production factors were involved, there would be no need for further boosting the growth in production and employment. However, it should be noted that some authors harbor doubts that such institutional framework, which would encourage the central bank to conduct monetary policy that implies the zero inflation rate, might exist at all (Blinder, 1999). The solution proposed by Rogoff (1985) has eventually become an integral part of the theoretical concept of central bank independence, by which the terms conservatism and independence have been to some extent implicitly equated. However, Rogoff wrote that: "[...] society can make itself better off by selecting an agent to head the independent central bank who is known to place greater weight on inflation stabilization relative to unemployment stabilization [...]" (1985, p. 1177). The above cited assertion clearly shows that the central bank independence does not have to involve conservatism. These two concepts should be demarcated in more detail, as already pointed out by Cukierman (1996) and Hillman (1999).
This demarcation is of a particular importance for the NBS since it was noticed that the negative consequences of equating the terms independence and conservatism of the central bank are most visible in the third world states, as well as in transition economies. Hillman (1999) used the Central Bank of Belarus, which possessed a certain degree of independence, as an example; however, at the end, the central bank governor was dismissed by the Minister of Finance, due to a disagreement between the Government's policy and the central bank policy. By this example, Hillman concludes that it is necessary to pay attention to the practical functioning of a central bank, as well as that the "conservative banker" is not a guarantee of the low inflation rate without full monetary independence from the executive power. In some developed states, different examples might be found. Thus, the Central Bank of Japan maintains a constantly low inflation rate in spite of being strongly influenced by the Ministry of Finance. The US Fed (Federal Reserve System) enjoys significantly more de facto independence than it is formally prescribed by the federal law (Randall, 2014), and the Central Bank of Germany formally holds independence but de facto almost always acts in accordance with the policy of the federal government (Vaubel, 1997). Having in mind the above-listed examples, it becomes obvious that the central bank independence and conservatism are rather complementary concepts than terms with the same meaning. It should be noted that some authors describe the independence and conservatism as substitutes (Eijffinger and Hoeberichts, 1998). In any event, it seems undeniable that the independence and conservatism are two different terms, which should not be attributed the same or similar meaning.
Initially, it was important to detect and define the key issues, while the further historical development of the theoretical concept of central bank independence is characterized by the development of its various aspects (political, personal and financial aspects). The additional complexity of the theoretical concept could be noticed by analyzing the numerous variables, such as the central bank's reputation, the influence of various interest groups, the political and general inflation culture, which could be defined as dominant preferences of the population towards the inflation.

Political Independence
The central bank's independence in a political sense implies the substantial independence in formulating and implementing the required policies (Bade and Parkin, 1982). This primarily means that the central bank is able to create and implement the necessary policy without the pressure of the government, which has an incentive to influence the inflation rate. The political independence of the central bank may be presented in a simple way by using the principal-agent model with the rational expectations in the conditions of uncertainty (Donato, 2012). Namely, if citizens are to be seen as the principal who demands the optimal regulation of the central bank's status, and the government as the agent that needs to meet all Ilić N. Theoretical concept of central bank independence and legal status of the National bank of Serbia mandat i u krajnjem efektu maksimizuje svoje blagostanje, tj. blagostanje članova vlade. Kao jedan od krajnjih efekata, može se uočiti i razlika između formalne i faktičke političke samostalnosti. Nasuprot jasno definisanoj političkoj samostalnosti u statutima centralnih banaka, kao i u zakonskim propisima, vlada često nalazi način da neformalnim putem utiče na formiranje i sprovođenje monetarne politike u državi. Zbog svega navedenog, deluje da bi vlada trebalo da depolitizuje monetarnu politiku, tako što će monetarnu vlast dodeliti stručnim tehnokratama sa dugim mandatima, koji su izolovani od svakodnevnih političkih zbivanja u svojoj zemlji (Eggertsson and Le Borgn, 2003). Ipak, politička samostalnost je mnogo kompleksnija nego što se to na prvi pogled čini. U kojoj meri je ostvarena politička samostalnost, moguće je ustanoviti samo ako se teorijska koncepcija samostalnosti centralne banke sagleda u celini, uzimajući u obzir njenu kompleksnost i vremensku nekonzistentnost u ponašanju velikog broja relevantnih aktera.

Personal Independence
In addition to political independence, personal independence constitutes one of the milestones of the unique theoretical concept of independence and refers to the election of the central bank's bodies, including the governor, as well as the crucial decision making procedures.
Considering that the appointment, dismissal, and length of the mandate of the central bank's governor were particularly highlighted during the creation of the index for measuring the central bank independence (Cukierman, Webb and Neyapti, 1992), it may be concluded how important personal autonomy is. If the political independence is provided, without the adequate personal independence, the problem of inflationary tendencies previously described by Barro and Gordon (1983) will not be solved. Basically, if the ability of a government to appoint and dismiss a governor in accordance with its own interests is not impeded, the central bank independence cannot be provided. One solution for personal independence, which seems to be successful in practice, is the extension of the governor's mandate so that it lasts longer than the one of the government. Eggerston and Borgne (2003) provided empirical evidence that the extension of the governor's mandate reduces the inflation rate variability and instability of the output gap. Therefore, it is necessary to create a significant difference (independence) between the mandate of the government and the governor, including the possibility of re-election of the governor so that its mandate lasts longer than 10 years. In this way, the personal independence would be mostly achieved, which is one of the key preconditions for the central bank institutional independence. In addition, according to the Rogoff's model (1985), the central bank's governor should have preferences that are publicly known in advance but should also be qualified. Without professional knowledge and work experience in the field of monetary policy, the governor (for practical reasons) cannot be independent in his/her work.

Financial Independence
In financial terms, the independence primarily means a complete separation of the central bank's monetary policy and the fiscal policy pursued by the government. In other words, the central bank's seigniorage cannot be used for implementation of fiscal policy, which includes, among others, the financing of the budget deficit. This is another key step in the development of the theoretical concept of independence.
Iz prvog stava ovog člana, jasno proizlazi da je NBS samostalna institucija. Međutim, Ilić N. Teorijska koncepcija samostalnosti centralne banke i pravni status Narodne banke Srbije defined as the ability to use monetary policies' instruments without any restrictions, which primarily implies the obligation of financing the budget deficit. The said concept of financial independence was subsequently further improved by Alberto Alesina (1993), who simultaneously observed the characteristics of several central banks and inflation rates recorded in many states during a defined period of time (from 1955 to 1988). The results derived from his research have pointed out to an indisputable conclusion that the central bank independence, together with monetary discipline, reduces the inflation rate variability without a significant reduction in the achieved macroeconomic performances. In the mentioned analysis, Alesina raised another issue that is significant for the central bank financial independence and that refers to the dilemma of choosing between rules and discretionary powers of the monetary authority. On the one hand, the transparent and predetermined rules serve the predictability and stability of monetary policy, as well as its separation from the government's fiscal policy, whereas, on the other hand, the introduction of discretionary powers provides a much higher degree of political and personal independence. In any event, it seems undeniable that the central bank financial independence is essential in order that the political and personal independence produce a positive effect on inflation movements and price stability in a state. However, the sole relation between the political, personal and financial independence is much more complex than it may seem at the first glance. Therefore, it is necessary to further consider the central bank independence as the unique concept that simultaneously sublimates all analyzed aspects of institutional independence.

The Unique (Modern) Theoretical Concept of Central Bank Independence
There are numerous authors that highlighted the complexity of the theoretical concept of central bank independence, but also its shortcomings. The severest critics start from the premise that the central bank independence is neither a necessary nor sufficient precondition for achieving monetary stability. It is stated that the central bank independence is only one of the many potentially useful instruments for the formation of monetary policy (Bernd and Carsten, 2001). In addition, the endogenous nature of the central bank independence is justifiably pointed out, given that it depends on a number of specific factors relating to the particular institutional framework in every state. Taking into account the expressed endogeneity these authors dispute that the observed correlation between the central bank independence and a relatively low inflation rate does not indicate causality. The theoretical concept of independence, as understood in a broader context, can be connected with a general inflation culture in the respective state, as well as the political consensus on monetary stability in the states with low inflation rate (Bernd, 1997). What is particularly important for developing countries, such as Serbia, is that the additional variables that are not relevant in the developed countries must be taken into account when analyzing the inflation rate, so that the generally accepted index of the central bank independence loses its significance to a large degree (Haan and Sturm, 2001). However, despite the noted critics, it is difficult to deny the major importance of central bank independence when it comes to the formation and implementation of monetary policy. It is obvious that the government has its own interests, which do not require only low inflation and stable monetary policy (Miller, 1998). As a result, the theoretical concept of central bank independence not only remained present in theory and practice, but also developed further under the influence of critics and through a synthesis of the political, personal and financial independence. It is not possible to establish a priori what the optimal relation between all different aspects of the central bank institutional independence looks like. The optimality will largely depend on a particular case, i.e. a particular social order.

Legal Status of the Central Bank in the Republic of Serbia
The legal status of the NBS is defined by the Constitution of the Republic of Serbia, the Ilić N. Theoretical concept of central bank independence and legal status of the National bank of Serbia već drugi stav stvara prostor za postojanje određene razlike između formalne i faktičke samostalnosti, što su već uočili domaći autori (Đukić, 2016). Naime, propisano ovlašćenje guvernera da rukovodi Narodnom bankom može se tumačiti na različite načine, posebno ako se ima u vidu da je u materiji ustavnog prava uobičajena reč "upravljanje" a ne "rukovođenje". Tako se upravlja javnim poslovima (čl. 53, 77), javnom imovinom (čl. 183, 190), socijalnim i dobrotvornim ustanovama (čl. 44) i slično, dok reč "rukovodi" ustavotvorac koristi samo na jednom mestu -u citiranom članu 95, kojim se uređuje pravni status NBS. Ova naizgled mala terminološka razlika stvorila je velike probleme u pravnoj i ekonomskoj praksi, kada je, slično trenutno važećem rešenju, Ustav Savezne Republike Jugoslavije predviđao da: "Narodnom bankom Jugoslavije rukovodi i za njen rad odgovara guverner." (Sl. list SRJ, br. Law on the National Bank of Serbia, as well as by other applicable laws and regulations. In order to determine the extent to which the legal status of the central bank provides conditions for its independence, it is necessary to examine more closely the most important provisions in this field, as well as its interpretation and application in practice. The basis for the NBS legal status is determined by the Constitution: "The National Bank of Serbia shall be the central bank of the Republic of Serbia, independent and subject to the supervision by the National Assembly, to which it is responsible. National Bank of Serbia is managed by the governor elected by the National Assembly" (Constitution of the RS, Official Gazette of the RS, no. 98/2006, Article 95).
It is clear from the first paragraph of this Article that the NBS is an independent institution. However, the second paragraph makes room for certain discrepancies between formal and factual independence, as already noted by domestic authors (Đukić, 2016). The prescribed authorization of the governor to manage the National Bank may be interpreted in different ways, especially taking into account that, in constitutional law, the common term in use is "govern" rather than "manage". Thus, one can govern the public affairs (Art. 53.77), public property (Art. 183.190), social and charitable institutions (Art. 44) etc., while the word "manage" is used by the legislator only once -in the cited Article 95, regulating the legal status of the NBS. This seemingly small terminological difference has already created great problems in legal and economic practice, when, similarly to the applicable legal provision, the Constitution of the Federal Republic of Yugoslavia prescribed that: "The governor manages the National Bank of Yugoslavia and is responsible for its work." (Official Gazette of the FRY, no. 1/92, Article 114). Subsequently, upon the entry into force of the FRY Constitution, the former Law on the National Bank of Yugoslavia established "governing bodies" of the NBY, consisting of the governor and the Council of the NBY. The Council was composed of six members with the 5-year mandate, out of which 3 members were appointed on written proposal by the Federal Government (Law on the NBY, Official Gazette of the FRY, no. 32/93, Articles 12 and 13). This creativity of the Yugoslav lawyers might be explained by the need expressed by the FRY Government to establish a control over the NBY during the hyperinflation, which lasted from April 1992 until February 1993 in Yugoslavia, according to the criteria recognized by Cagan (1956). Only three years after the end of the hyperinflation, in 1997, the proceeding for assessment of the constitutionality of those statutory provisions was officially initiated before the former Federal Constitutional Court. The court decision, which declared that the challenged provisions are not in compliance with the FRY Constitution, was rendered two years later on 22 July 1999, which can be interpreted as the strong Government's pressure to retain direct control over the NBY even during the relatively stable inflation in the country (Decision of the FCC, IU no. 120/96). Due to the existence of such practice, when enacting the new Constitution in 2006, the Article 95 should have been specified and any possibility of the Government's interference in the institutional (political, personal and financial) independence of the NBS should have been explicitly excluded. This criticism should also be borne in mind in the case of any potential amendments to the Constitution of the RS.
It is commendable that the legislator prescribed in a separate provision the ability of the NBS to influence the institutional arrangement of the monetary system (Constitution of the RS, Official Gazette of the RS, no. 98/2006, Art. 107). However, the possibility of submitting legislative proposals does not mean a lot if the factual central bank independence has not been provided beforehand.
Kada je u pitanju opšta inflaciona kultura, definisana kao dominantne preferencije koje građani imaju u odnosu na inflaciju, deluje da građani u Republici Srbiji imaju bogato iskustvo ali da su iz tog iskustva izvukli malo pouka, ili da te pouke ne mogu praktično da However, the institutional independence of the NBS is emphasized exclusively in performing its functions defined in Article 4 of the Law, while the prohibited influences are not defined and the specific ways in which the NBS should be protected from these influences are not listed. Therefore, it would be advisable to specify the different types of prohibited influences on the NBS in more detail and extend the legal protection to those cases which do not currently qualify as the performance of the functions referred to in Article 4 of the Law. In addition, in order to adequately secure the institutional independence of the NBS, it would be advisable to harmonize the provisions that regulate the relations between the NBS, the Government and the National Assembly simultaneously with the mentioned amendments (Articles 71 and 72 of the Law on the NBS). Based on the cited Article 2 of the Law, it remains unclear whether there is a difference between the autonomy and independence of the NBS. The legislator properly uses only the term independence, which has a narrower meaning compared to the term autonomy and fully adapts to the institutional environment in which the NBS should function. However, the Law also introduces the term autonomy, probably in order to further emphasize the importance of independence, by which it unnecessarily creates dissonance in the legal system of the Republic of Serbia. The institutional independence can be ensured only by the clear and precise rules and not pompous terms that have no meaning defined by the law.
Može se zaključiti da je pored usklađivanja zakonskih propisa sa međunarodnim standardima u ovoj oblasti, neophodno preduzeti konkretne korake ka očuvanju i daljem poboljšanju političke i opšte inflacione kulture. Na taj način može doći do nestanka uočene diskrepance između formalne i faktičke samostalnosti NBS, što je condicio sine qua non efikasnog institucionalnog mehanizma i razvijene tržišne privrede. In addition, the scope of the Governor's competencies has been drastically reduced by a different definition of the composition of the Executive Board (Art. 13), which, in accordance with the Law, determines the monetary and foreign exchange policies (Art. 14, paragraph 1). The function of the Governor has (again) been reduced to management, but this time to the management of the NBS operations and implementation of decisions rendered by the Executive Board and the Council (Art. 18, paragraph 1, points 1 and 2). Therefore, the wording of Article 2 of the Law, which in addition to the NBS independence points out to its autonomy, is even less clear. In addition to the formal statutory provisions, it is crucial to bear in mind the general theoretical concept of independence and the fact that good legal solutions are a necessary, but not sufficient condition for the central bank's independence and functioning. Legal provisions relating solely to the appointment of the NBS Governor are the obvious example which supports the above statement. Following the mentioned decision of the FCC and numerous amendments to the law, these provisions have been largely aligned with international practice. However, over a period of 14 years (2003-2017), none of the five governors remained in that position for six years, i.e. the whole mandate prescribed by the law. The existence of this discrepancy between the formal and factual independence of the NBS points out to the previously mentioned theoretical criticism, based on which a modern theoretical concept of the central bank independence has been introduced, and in particular to the existence of the specific political and inflation culture.
The variable specific for the Republic of Serbia which creates the conditions for the degradation of the NBS independence is the political culture i.e. the parliamentary multiparty system, which operates as a single-party system in practice. Without a shadow of a doubt in the good intentions of the party with the absolute majority, it is obvious that a (large) interest group controls the appointment of all NBS bodies. As a result, the institutional control mechanisms do not operate effectively, given that the interest group can hardly establish selfcontrol, which would be a necessary condition for the factual independence of the NBS under the current circumstances.
When it comes to the general inflation culture, which is defined as a dominant preference that the citizens have with regard to inflation, it seems that the population in the Republic of Serbia despite its considerable experience has not drawn many lessons from that experience, or is unable to apply these lessons in practice. Considering the broader institutional arrangement, the inflation culture should be an integral part of the control mechanism that would force the NBS to determine a stable monetary policy and resist the inflationary tendencies. However, even this control mechanism is jammed due to the absence of several interest groups, which would direct the influence on the NBS, so as to clearly demonstrate the dominant preferences of the citizens with regard to inflation, without compromising on either formal or factual independence of the NBS at the same time.
It seems that a large number of formal and informal individual rules, which should guarantee the institutional independence of the NBS, have failed. Therefore, it is necessary to adopt a completely different approach that does not involve the proclamation of autonomy of the NBS, but the constant work on creating its formal and factual institutional independence. Such approach also requires a creation of the favorable institutional environment, which is reflected in the harmonization of various groups' actions, by the smooth articulation of their interests and by means of the defined and time-consistent legal provisions. In this way, it is possible to establish an independent institution in the true sense of the word, as defined by the Nobel Laureate North (1991): "humanly devised constraints that structure political, economic and social interactions." The first practical step in creating the mentioned institutional environment is the amendments to the formal (statutory) norms which are obviously not in compliance with the letter and spirit of the Constitution of the RS, such as Article 14 Paragraph 1; Article 18 Paragraph 1 Item 2; and Article 23 Paragraph 1 Item 2 of the Law on the NBS. The next step, which is rather more challenging, implies the further depoliticization of monetary policy and the further

Concluding Remarks
By analyzing the historical development of the theoretical concept of central bank independence, it can be concluded that a rapid development occurred in a relatively short period of time in this area. The development of economics has contributed to a better understanding of the monetary system as a whole, and thus, to the creation of new institutional arrangements in practice. However, despite the theoretical findings that are harmonized to a great extent and the rapid development of the concept of central bank independence, in reality, the process of institutional evolution of central banks is carried out at a different pace. This fact supports the unique approach to the concept of independence, which simultaneously sublimates in itself the political, personal and financial independence, as well as certain additional variables that are typical for each state and its monetary system. It follows that, despite the unique theoretical concept of independence, there is no universal solution that each of the states concerned could implement in its own legal and/or economic system, thus creating an independent central bank "overnight".
In the case of the Republic of Serbia, the legislation relating to the organization of the NBS corresponds to a certain degree to the internationally recognized standards in this area. However, when it comes to the selection of the governor (or governing bodies) of the NBS and especially when it comes to their replacements, it has been shown that the factual independence significantly deviates from the formal one, established by the Constitution and the Law on the NBS.
It can be concluded that, in addition to the harmonization of legislation with the international standards in this field, it is necessary to take concrete steps towards maintaining and further improving the political and general inflation culture. Thus, the observed discrepancy between the formal and de facto independence of the NBS might disappear, which is the condicio sine qua non for an effective institutional mechanism and a developed market economy.