Macroeconomic Implications of Exchange Rate Regime: The Case of Macedonia
154 Pages Posted: 10 Dec 2007
Date Written: March 2007
The aim of this paper is to acknowledge macroeconomic performance effects of different exchange rate regimes. Principally, regime's effects on inflation and growth are comprehensively discussed and examined. Literature acknowledged that regime's pegging contributes to lowering inflation and stabilizing the economy. On the other hand, regime's effect on growth is vague and usually draws upon other circumstances in particular country/ies.
Using monthly data for the macro-variables in FYR Macedonia in the period April 1992 - June 2006, this paper employs VAR methodology to test the causal relationships between exchange rate regime on one hand, and inflation and growth on the other. Key findings from the research as to the inflation conform to already conceded linkage regime - inflation. That is, FYR Macedonia exhibited 18% lower inflation per year under a fixed peg than it would have experienced under some more flexible alternative. Yet, findings for growth showed that peg harmed FYR Macedonian economy and it exhibited 2.17% lower growth per year than it would have achieved under some more flexible option of the exchange rate.
Keywords: exchange rate regime, Macedonia, macroeconomic effects, pegged rate
JEL Classification: E50
Suggested Citation: Suggested Citation