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Macroeconomic Dynamics in Macedonia and Slovakia: Structural Estimation and Comparison

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  • Melecky, Martin

Abstract

This paper estimates the structural model of Linde et al. (2008) using data for Macedonia and Slovakia. A comparison of the estimated model parameters suggest that, in Slovakia, the output gap is less sensitive to real interest rate movements and prices experience greater inertia. The estimated monetary policy reaction functions present Macedonia and Slovakia as inflation targeters, with Macedonia as the more conservative one, despite its officially applied exchange rate targeting regime. The differences in estimated parameters imply differing transmission mechanisms for Macedonia and Slovakia. Consequently, the variance of domestic variables in Slovakia is most influenced by monetary policy shocks, while there is no single dominating shock explaining the volatility of Macedonia’s macroeconomic variables. The exchange rate shock, the monetary policy shock and the demand shock are jointly important in determining the volatility of Macedonia’s variables. The model simulations indicate that Macedonia experiences lower output gap and inflation volatility than Slovakia. This comes, nevertheless, at the cost of higher interest rate and real exchange rate volatility in Macedonia, which could be an indication of more volatile financial markets.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 19863.

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Date of creation: Jan 2010
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Handle: RePEc:pra:mprapa:19863

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Keywords: Structural Open-Economy Model; Bayesian Estimation; Eastern European Transition Economies.;

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