The Monetary Transmission Mechanism in Macedonia: Implications for Monetary Policy
Centre for Research on Emerging Economies Working Paper No. 02-2006
34 Pages Posted: 22 May 2014
Date Written: 2006
This paper investigates the monetary transmission mechanism in the Republic of Macedonia to better inform monetary policy, which is currently dedicated to price stability. We analyse long-run equilibrium relationships, adjustment mechanisms and short-run influences between the price level, output and transmission channels: namely, the denar-euro exchange rate; the interest rate; money supply; and - extending the literature - currency substitution. Among our findings are that exchange rate and money supply changes have stronger effects on domestic prices than interest rate changes; devaluation raises currency substitution; and currency substitution attenuates inflationary pressures. We conclude that monetary policy makers in similar economies should take currency substitution into consideration when designing monetary policy and contemplating changes in monetary regime.
Keywords: monetary policy, transmission mechanism, transition economy, euroisation
JEL Classification: E31, E58, P24, P52
Suggested Citation: Suggested Citation