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Aggregate Demand–Inflation Adjustment Model Applied to Southeast European Economies

Author

Listed:
  • Mico Apostolov

    () (UGD, Stip – Macedonia)

  • Dusko Josevski

    () (UGD, Stip – Macedonia)

Abstract

Applying IS-MP-IA model and the Taylor rule to selected Southeast European economies (Albania, Bosnia and Herzegovina, Macedonia and Serbia) we find that the change of effective exchange rate positively affects output, while the change of the world interest rate negatively affects output or it does not affect the output at all, and additional world output would help to increase output of the selected economies. A lower ratio of government consumption spending to GDP would also increase the output of the selected economies. Hence, fiscal prudence is needed, and the conventional approach of real depreciation to stimulate exports and raise real output does not apply to the selected Southeast Europe economies. When private household consumption is employed in the model, the coefficient on government spending to nominal GDP is insignificant implying that Ricardian equivalence does hold for the selected countries.

Suggested Citation

  • Mico Apostolov & Dusko Josevski, 2016. "Aggregate Demand–Inflation Adjustment Model Applied to Southeast European Economies," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 5(1), pages 141-157.
  • Handle: RePEc:cbk:journl:v:5:y:2016:i:1:p:141-157
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    References listed on IDEAS

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    More about this item

    Keywords

    IS-MP-IA; Taylor Rule; inflation targeting; monetary policy function; government spending to nominal GDP; world interest rates;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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