Reliability of the Exchange Rate as a Monetary Target in an Unoptimal Currency Area - Macedonian Case

The main topic of the research work is, whether the exchange rate targeting is an efficient strategy for maintaining price stability without decelerating the economic growth below the potential one in a situation when national currency area is not an optimum currency area with the anchor currency country in the Mundell-McKinnon style. The research work is devided into six chapters. In the first introductory chapter the set up of the Macedonian monetary order is presented, together with the outline what is following in next five chapters. The main topic of investigation in the second chapter is, if there is an alternative efficient strategy, except exchange rate targeting, for maintaining price stability in a small and open economy that is highly integrated into the international trade and financial flows. The research topic in third chapter is what are preconditions for a national currency area to be an optimum currency area. In the fourth chapter the benefits and costs of exchange rate targeting strategy in Macedonia are presented regarding the monetary policy (money supply growth and interest rates), domestic prices, international competitiveness and employment and output. In the fifth chapter, the regime of the exchange rate that is appropriate for intermediate monetary target and viable on long-run is analyzed from the point of view of eight factors: openness and integration into the world economy, the scope of concentration of trade towards particular regions or countries, the level of currency substitution in the domestic economy, the depth of financial and foreign exchange market, the level of wage elasticity and labour mobility, the degree of capital mobility, the stability/instability of money demand, the scope of product and export diversification and the level of economic development and expected future potential growth. The concluding remarks are presented in the sixth chapter. The econometric technique is widely used in the assessment of the relationships between some economic variables. It is especially used in testing the stability of money demand, the assessment of the volatility of the real exchange rate, and assessment of the elasticity of nominal wages with respect to prices and unemployment. The research period is January - June 1997 and it is constrained by two factors. First, the monetary order in Macedonia was set up at the end of April 1992, when Macedonia came out from the Yugoslav dinar zone. Second, the period before January 1994 is not included in the research work, because of the disrupted data and relations due to the very high inflation (near to hyperinflation) in the period before and immediately after the monetary independence (April 1992 - December 1993). Furthermore, taking in mind the research topics, the period April 1992 - December 1993 is not relevant, and even can lead to wrong conclusions. In some cases the research period is extended to September 1997, in order effects of devaluation that occurred on July 9th, 1997 to be analyzed.