Monetary policy in a small open economy with fixed exchange rate: The case of Macedonia
AbstractThis 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.
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Bibliographic InfoArticle provided by Elsevier in its journal Economic Systems.
Volume (Year): 36 (2012)
Issue (Month): 4 ()
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Web page: http://www.elsevier.com/locate/inca/621171
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New Keynesian model; Monetary policy; Fixed exchange rate; Macedonia;
Find related papers by JEL classification:
- E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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- Branimir Jovanovic & Marjan Petreski, 2012. "Hemlock for policy response: Monetary policy, exchange rates and labour unions in SEE and CIS during the crisis," FIW Working Paper series 081, FIW.
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