Najdov, EvgenijMelecky, Martin2012-05-312012-05-312008-08https://hdl.handle.net/10986/6796This 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.CC BY 3.0 IGOADVERSE EFFECTSAGGREGATE DEMANDAGGREGATE SUPPLYARBITRAGEBANKING SECTORBANKING SECTORSBENCHMARKBENCHMARKINGBILATERAL EXCHANGE RATESBILLCAPACITY CONSTRAINTSCAPITAL FLOWSCAPITAL GOODSCAPITAL MARKETCAPITAL MARKET DEVELOPMENTCAPITAL MARKETSCAPITAL STOCKCENTRAL BANKCOMPETITION POLICYCOMPETITIVENESSCONSOLIDATIONCONSUMERSCONSUMPTION GOODSCONSUMPTION SMOOTHINGCORNER SOLUTIONSCORRELATION COEFFICIENTSCOVARIANCE MATRIXCURRENCY APPRECIATIONDEBTDEFLATIONDEPENDENT VARIABLEDEPOSITDEPOSITSDEPRECIATIONDEVALUATIONDISPOSABLE INCOMESDOMESTIC CREDITDOMESTIC CURRENCYDOMESTIC CURRENCY PRICEDOMESTIC DEMANDDOMESTIC ECONOMIC ACTIVITYDOMESTIC ECONOMYDOMESTIC INTEREST RATEDOMESTIC INTEREST RATESDOMESTIC MARKETDUMMY VARIABLEECONOMETRIC ANALYSISECONOMIC ENVIRONMENTECONOMIC GROWTHECONOMIC POLICYECONOMIES OF SCALEEFFECTIVE EXCHANGE RATESELASTICITYELASTICITY OF OUTPUTENDOGENOUS VARIABLEEQUILIBRIUMEXCESS CAPACITYEXCESS DEMANDEXCHANGE RATEEXCHANGE RATE ANCHOREXCHANGE RATE CHANNELEXCHANGE RATE INCREASEEXCHANGE RATE PEGEXCHANGE RATE RISKEXCHANGE RATE SHOCKSEXCHANGE RATE TARGETINGEXPECTED VALUEEXPLANATORY VARIABLESEXPORT DIVERSIFICATIONEXTERNAL POSITIONEXTERNAL SHOCKEXTERNAL SHOCKSFEDERAL RESERVEFEDERAL RESERVE BANKFINANCIAL INSTITUTIONSFINANCIAL INSTRUMENTSFINANCIAL INTERMEDIATIONFINANCIAL MARKETSFINANCIAL SECTORFISCAL POLICIESFISCAL POLICYFISCAL SHOCKFISCAL SHOCKSFIXED EXCHANGE RATEFIXED EXCHANGE RATE REGIMEFIXED EXCHANGE RATE REGIMESFLEXIBLE EXCHANGE RATEFLEXIBLE EXCHANGE RATE REGIMEFOREIGN CURRENCYFOREIGN INFLATIONFOREIGN INTERESTFOREIGN INTEREST RATEFOREIGN REAL INTEREST RATEFUTURE INFLATIONGDPGOVERNMENT BONDSGOVERNMENT EXPENDITURESGOVERNMENT INVESTMENTGOVERNMENT POLICIESGOVERNMENT POLICYGOVERNMENT SECURITIESGROWTH POLICIESIMPORTIMPORT DEMANDIMPORTSINDEXATIONINDUSTRIAL ECONOMIESINFLATIONINFLATION DYNAMICSINFLATION EXPECTATIONSINFLATION TARGETINGINFLATION TARGETING REGIMESINSTRUMENTINTEREST PARITYINTEREST RATEINTEREST RATE CHANGESINTEREST RATESINTEREST-RATEINTEREST-RATE DIFFERENTIALSINTERNATIONAL BANKINTERNATIONAL ECONOMICSINTERNATIONAL FINANCIAL STATISTICINTERNATIONAL FINANCIAL STATISTICSINTERNATIONAL MONEYINVESTMENT CLIMATEINVESTMENT DEMANDLABOR FORCELABOR MARKETSLIBERALIZATIONLIQUIDITYLIQUIDITY CONSTRAINTSLIVING STANDARDSLOCAL CURRENCYMACROECONOMIC POLICIESMACROECONOMIC STABILITYMACROECONOMIC STABILIZATIONMARGINAL COSTMARGINAL COST OF PRODUCTIONMARGINAL COSTSMARKET ACCESSMAXIMUM LIKELIHOOD METHODMONETARY AUTHORITYMONETARY ECONOMICSMONETARY POLICYMONETARY POLICY REGIMEMONETARY POLICY REGIMESMONEY MARKETNATIONAL BANKNET EXPORTSNOMINAL ANCHORNOMINAL EXCHANGE RATENOMINAL INTEREST RATENOMINAL WAGESOPEN ECONOMIESOPEN ECONOMYOPTIMIZATIONOUTPUT GAPOUTPUT GAPSOUTPUT RESPONSEPER CAPITA INCOMESPHILLIPS CURVEPOLITICAL ECONOMYPOTENTIAL OUTPUTPOVERTY REDUCTIONPRICE COMPETITIVENESSPRICE RIGIDITIESPRICE STABILITYPRODUCT MARKETSPROFIT MARGINSPROPERTY RIGHTSRAPID GROWTHRE-EXPORTSREAL EFFECTIVE EXCHANGE RATEREAL EXCHANGE RATEREAL GDPREAL INTERESTREAL INTEREST RATERELATIVE PRICERELATIVE PRICESREPOREPO RATERISK PREMIUMSECTOR REFORMSSTANDARD DEVIATIONSTANDARD DEVIATIONSSTEADY STATESTOCK MARKETSTOCK MARKET CAPITALIZATIONSTRUCTURAL REFORMSSTRUCTURAL SHOCKSSUPPLY SHOCKST-BILLSTAX REVENUESTOTAL EXPORTSTRADE INTEGRATIONTRADE POLICYTRANSITION ECONOMIESTRANSMISSION MECHANISMTRANSMISSION MECHANISMSUNCERTAINTYUNEMPLOYMENTUNEMPLOYMENT RATEVALUE ADDEDWEALTHWEIGHTSZERO WEIGHTWorld Bank10.1596/1813-9450-4691