Monetary Policy in a Small Open Economy with Fixed Exchange Rate: The Case of Macedonia

Posted: 6 Dec 2012

See all articles by Branimir Jovanovic

Branimir Jovanovic

University of Rome Tor Vergata

Marjan Petreski

University of American college - Skopje - School of Business Economics and Management

Date Written: 2012

Abstract

This paper empirically applies the New Keynesian model for monetary policy analysis in a small open economy with a fixed exchange rate. Official reserves are included in the interest rate rule to account for the constraint that these impose on monetary policy when the exchange rate is fixed. Also, the foreign interest rate is included in order to reflect the necessity of following the foreign monetary policy. The model is applied to Macedonian data from the period 1997 to 2011. In general, results indicate that monetary policy has been focused on domestic objectives during this period, despite the fixed currency. In addition, there seem to have been significant differences in the conduct of the monetary policy in the first and second half of this period. The response to inflation has been more aggressive in the earlier period, at a time when reserves appear less important, while the output gap is found to be important only in the latter period, possibly due to the stronger monetary policy transmission. Finally, results indicate that the monetary policy has likely moved from adaptive in the first period to rational in the second period.

Keywords: New Keynesian model, monetary policy, fixed exchange rate, Macedonia

JEL Classification: E12, E43, E52

Suggested Citation

Jovanovic, Branimir and Petreski, Marjan, Monetary Policy in a Small Open Economy with Fixed Exchange Rate: The Case of Macedonia (2012). Economic Systems, Vol. 36, No. 4, 2012, Available at SSRN: https://ssrn.com/abstract=2185988

Branimir Jovanovic

University of Rome Tor Vergata ( email )

Via di Tor Vergata
Rome, Lazio 00133
Italy

Marjan Petreski (Contact Author)

University of American college - Skopje - School of Business Economics and Management ( email )

Skopje, 1000
Macedonia

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