Assessing independent monetary policy in small, open and euroized countries: evidence from Western Balkan

Igor Velickovski

Empirical Economics, 2013, vol. 45, issue 1, 137-156

Abstract: This article approaches to the optimum currency area from the empirical side by investigating the costs of adoption of a single currency for small, open and euroized Western Balkan countries (WBC). Using several econometric techniques, this study attempts to answer three questions relevant for monetary integration of the WBC and similar transition countries: What are the constraints on an independent monetary policy? What is the need for operating an independent monetary policy? and What is the ability to conduct an independent monetary policy? The constraints on independent monetary policy in most of the WBC at this stage are relatively serious because of high levels of openness and euroization. They limit the ability of the central bank, which is oriented to price stability, to use the nominal exchange rate for achieving other goals (for example, output stabilization). Regarding the second question, the results from structural VAR framework suggest a low synchronization for supply and demand shocks between the WBC and the euro area, indicating potentially high costs of losing independent monetary policy. Furthermore, the results from Kalman filter technique inform that the shock convergence process is slow or absent in the WBC vis-à-vis the euro area. Regarding the last question, the results from cointegration and VAR analysis suggest that the ability to conduct an independent monetary policy, assessed by analyzing the interest rate channel as the most prominent transmission channel in the euro area, is relatively weak in the WBC. Copyright Springer-Verlag 2013

Keywords: Optimum currency area; Monetary policy; Shock synchronization; Interest rate pass-through; E42; E52; E32; E43 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (10)

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DOI: 10.1007/s00181-012-0612-2

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