Publication: Comparing Constraints to Economic Stabilization in Macedonia and Slovakia : Macro Estimates with Micro Narratives
Date
2008-08
ISSN
Published
2008-08
Author(s)
Melecky, Martin
Najdov, Evgenij
Abstract
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.
Citation
“Melecky, Martin; Najdov, Evgenij. 2008. Comparing Constraints to Economic Stabilization in Macedonia and Slovakia : Macro Estimates with Micro Narratives. Policy Research Working Paper No. 4691. © World Bank, Washington, DC. http://openknowledge.worldbank.org/entities/publication/981797fd-b56f-5e9f-8744-987130d207d2 License: CC BY 3.0 IGO.”
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