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Fiscal and monetary policy effects in three South Eastern European economies

Goran Petrevski, Jane Bogoev () and Dragan Tevdovski ()

Empirical Economics, 2016, vol. 50, issue 2, 415-441

Abstract: Abstract This paper investigates the macroeconomic effects of monetary and fiscal policies in three South Eastern European economies: Bulgaria, Croatia and Macedonia. We employ recursive vector autoregressions in order to study the linkages among fiscal policy, monetary policy and economic activity based on quarterly data on primary cyclically adjusted balance, monetary policy indicators, inflation rate and output gap. We obtain the following main results: first, domestic economic activity exerts significant effects on inflation, provoking a strong reaction of monetary policy, especially in case of procyclical or erratic behavior of fiscal policy; second, we find evidence for the expansionary effects of fiscal consolidation since fiscal tightening leads to an increase in economic activity; third, the effects of monetary policy on output and inflation are generally as expected; fourth, monetary policy acts as a strategic substitute to tight fiscal policy, while in case of monetary tightening, fiscal authorities behave in a countercyclical manner.

Keywords: Fiscal policy; Monetary policy; VAR (search for similar items in EconPapers)
JEL-codes: C32 E52 E58 E62 E63 (search for similar items in EconPapers)
Date: 2016
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