Monetary policy in a small open economy with fixed exchange rate: The case of Macedonia

Branimir Jovanovic and Marjan Petreski ()

Economic Systems, 2012, vol. 36, issue 4, 594-608

Abstract: This 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.

Keywords: New Keynesian model; Monetary policy; Fixed exchange rate; Macedonia (search for similar items in EconPapers)
JEL-codes: E12 E43 E52 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:36:y:2012:i:4:p:594-608

DOI: 10.1016/j.ecosys.2012.02.003

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