Comparing Constraints to Economic Stabilization in Macedonia and Slovakia : Macro Estimates with Micro Narratives

This paper re-emphasizes the link from structural policies to enhanced macroeconomic stabilization using a small structural model estimated on quarterly data for Macedonia and Slovakia over 1995-2007. The success of macroeconomic stabilization, typically in the hands of monetary policy, is not only determined by a suitable choice of the nominal anchor, which shapes the reaction function of monetary policy, but also the constraints within which the monetary policy strives to achieve its objectives. The key attributes of the constraints to macroeconomic stabilization are economic rigidities and structural shocks. By benchmarking the estimated economic rigidities and structural shocks faced by Macedonia to those faced by Slovakia, the authors find that Macedonia has relatively weaker transmission mechanisms of monetary policy, higher output rigidity, and a lower exchange rate pass-through, and faces larger external shocks. For Macedonia, these relatively higher constraints on monetary policy together with the chosen exchange rate anchor result in greater output and inflation volatility relative to Slovakia. Hence, it appears that small, open economies with stronger economic rigidities should apply monetary policy regimes that allow for more flexible adjustments in external relative prices to enhance their macroeconomic stability.

Bibliographic Details

Main Authors:	Melecky, Martin, Najdov, Evgenij
Language:	English
Published:	World Bank, Washington, DC 2008-08
Subjects:	ADVERSE EFFECTS, AGGREGATE DEMAND, AGGREGATE SUPPLY, ARBITRAGE, BANKING SECTOR, BANKING SECTORS, BENCHMARK, BENCHMARKING, BILATERAL EXCHANGE RATES, BILL, CAPACITY CONSTRAINTS, CAPITAL FLOWS, CAPITAL GOODS, CAPITAL MARKET, CAPITAL MARKET DEVELOPMENT, CAPITAL MARKETS, CAPITAL STOCK, CENTRAL BANK, COMPETITION POLICY, COMPETITIVENESS, CONSOLIDATION, CONSUMERS, CONSUMPTION GOODS, CONSUMPTION SMOOTHING, CORNER SOLUTIONS, CORRELATION COEFFICIENTS, COVARIANCE MATRIX, CURRENCY APPRECIATION, DEBT, DEFLATION, DEPENDENT VARIABLE, DEPOSIT, DEPOSITS, DEPRECIATION, DEVALUATION, DISPOSABLE INCOMES, DOMESTIC CREDIT, DOMESTIC CURRENCY, DOMESTIC CURRENCY PRICE, DOMESTIC DEMAND, DOMESTIC ECONOMIC ACTIVITY, DOMESTIC ECONOMY, DOMESTIC INTEREST RATE, DOMESTIC INTEREST RATES, DOMESTIC MARKET, DUMMY VARIABLE, ECONOMETRIC ANALYSIS, ECONOMIC ENVIRONMENT, ECONOMIC GROWTH, ECONOMIC POLICY, ECONOMIES OF SCALE, EFFECTIVE EXCHANGE RATES, ELASTICITY, ELASTICITY OF OUTPUT, ENDOGENOUS VARIABLE, EQUILIBRIUM, EXCESS CAPACITY, EXCESS DEMAND, EXCHANGE RATE, EXCHANGE RATE ANCHOR, EXCHANGE RATE CHANNEL, EXCHANGE RATE INCREASE, EXCHANGE RATE PEG, EXCHANGE RATE RISK, EXCHANGE RATE SHOCKS, EXCHANGE RATE TARGETING, EXPECTED VALUE, EXPLANATORY VARIABLES, EXPORT DIVERSIFICATION, EXTERNAL POSITION, EXTERNAL SHOCK, EXTERNAL SHOCKS, FEDERAL RESERVE, FEDERAL RESERVE BANK, FINANCIAL INSTITUTIONS, FINANCIAL INSTRUMENTS, FINANCIAL INTERMEDIATION, FINANCIAL MARKETS, FINANCIAL SECTOR, FISCAL POLICIES, FISCAL POLICY, FISCAL SHOCK, FISCAL SHOCKS, FIXED EXCHANGE RATE, FIXED EXCHANGE RATE REGIME, FIXED EXCHANGE RATE REGIMES, FLEXIBLE EXCHANGE RATE, FLEXIBLE EXCHANGE RATE REGIME, FOREIGN CURRENCY, FOREIGN INFLATION, FOREIGN INTEREST, FOREIGN INTEREST RATE, FOREIGN REAL INTEREST RATE, FUTURE INFLATION, GDP, GOVERNMENT BONDS, GOVERNMENT EXPENDITURES, GOVERNMENT INVESTMENT, GOVERNMENT POLICIES, GOVERNMENT POLICY, GOVERNMENT SECURITIES, GROWTH POLICIES, IMPORT, IMPORT DEMAND, IMPORTS, INDEXATION, INDUSTRIAL ECONOMIES, INFLATION, INFLATION DYNAMICS, INFLATION EXPECTATIONS, INFLATION TARGETING, INFLATION TARGETING REGIMES, INSTRUMENT, INTEREST PARITY, INTEREST RATE, INTEREST RATE CHANGES, INTEREST RATES, INTEREST-RATE, INTEREST-RATE DIFFERENTIALS, INTERNATIONAL BANK, INTERNATIONAL ECONOMICS, INTERNATIONAL FINANCIAL STATISTIC, INTERNATIONAL FINANCIAL STATISTICS, INTERNATIONAL MONEY, INVESTMENT CLIMATE, INVESTMENT DEMAND, LABOR FORCE, LABOR MARKETS, LIBERALIZATION, LIQUIDITY, LIQUIDITY CONSTRAINTS, LIVING STANDARDS, LOCAL CURRENCY, MACROECONOMIC POLICIES, MACROECONOMIC STABILITY, MACROECONOMIC STABILIZATION, MARGINAL COST, MARGINAL COST OF PRODUCTION, MARGINAL COSTS, MARKET ACCESS, MAXIMUM LIKELIHOOD METHOD, MONETARY AUTHORITY, MONETARY ECONOMICS, MONETARY POLICY, MONETARY POLICY REGIME, MONETARY POLICY REGIMES, MONEY MARKET, NATIONAL BANK, NET EXPORTS, NOMINAL ANCHOR, NOMINAL EXCHANGE RATE, NOMINAL INTEREST RATE, NOMINAL WAGES, OPEN ECONOMIES, OPEN ECONOMY, OPTIMIZATION, OUTPUT GAP, OUTPUT GAPS, OUTPUT RESPONSE, PER CAPITA INCOMES, PHILLIPS CURVE, POLITICAL ECONOMY, POTENTIAL OUTPUT, POVERTY REDUCTION, PRICE COMPETITIVENESS, PRICE RIGIDITIES, PRICE STABILITY, PRODUCT MARKETS, PROFIT MARGINS, PROPERTY RIGHTS, RAPID GROWTH, RE-EXPORTS, REAL EFFECTIVE EXCHANGE RATE, REAL EXCHANGE RATE, REAL GDP, REAL INTEREST, REAL INTEREST RATE, RELATIVE PRICE, RELATIVE PRICES, REPO, REPO RATE, RISK PREMIUM, SECTOR REFORMS, STANDARD DEVIATION, STANDARD DEVIATIONS, STEADY STATE, STOCK MARKET, STOCK MARKET CAPITALIZATION, STRUCTURAL REFORMS, STRUCTURAL SHOCKS, SUPPLY SHOCKS, T-BILLS, TAX REVENUES, TOTAL EXPORTS, TRADE INTEGRATION, TRADE POLICY, TRANSITION ECONOMIES, TRANSMISSION MECHANISM, TRANSMISSION MECHANISMS, UNCERTAINTY, UNEMPLOYMENT, UNEMPLOYMENT RATE, VALUE ADDED, WEALTH, WEIGHTS, ZERO WEIGHT,
Online Access:	http://documents.worldbank.org/curated/en/2008/08/9762228/comparing-constraints-economic-stabilization-macedonia-slovakia-macro-estimates-micro-narratives http://hdl.handle.net/10986/6796
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