- Goran Petrevski is a Professor of Monetary Economics and International Finance at the Saints Cyril and Methodius University in Skopje, Macedoniaedit
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In this paper, we study whether adopting inflation targeting in emerging market economies affects the output costs of disinflation, controlling for a number of additional factors. Based on a sample of 40 emerging market economies during... more
In this paper, we study whether adopting inflation targeting in emerging market economies affects the output costs of disinflation, controlling for a number of additional factors. Based on a sample of 40 emerging market economies during 1990-2017, we provide evidence that adopting inflation targeting is not associated with lower sacrifice ratios in emerging market economies. Specifically, we show that, controlling for the macroeconomic and institutional environment in EMEs, the choice of monetary regimes does not matter for disinflation costs. We also find that, when starting from low to moderate initial inflation, the speed of disinflation (shock therapy versus gradual disinflation) does not matter in these economies. Moreover, we show that trade openness is associated with lower sacrifice ratios, while we obtain opposite results for central bank independence. However, the impact of these factors on sacrifice ratios is rather small. Our main findings are robust to alternative classifications of the inflation targeting regime, alternative definitions of disinflation episodes, different peak levels of trend inflation rate, and across various specifications of the empirical model.
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Although income redistribution is primarily a central government responsibility, decentralization can improve or deteriorate the equity in resource and income redistribution depending on how the process of decentralization is designed and... more
Although income redistribution is primarily a central government responsibility, decentralization can improve or deteriorate the equity in resource and income redistribution depending on how the process of decentralization is designed and implemented. This paper provides empirical evidence on the association between fiscal decentralization and income distribution for a panel of 11 economies from Central and Eastern Europe (CEE) during 1995-2011. In these regards, we focus on three research topics: the effect of decentralization on income inequality; the effects of the structure of local government finance on income inequality; and the validity of the Kuznets-hypothesis. The main findings from the empirical exercise are as follows: first, we cannot provide firm evidence on the presumes favourable effects of fiscal decentralization on income distribution in the CEE countries; second, our empirical model suggests that the effects of fiscal decentralization on income inequality depend o...
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This paper deals with the process of convergence of the Central and Eastern European (CEE) countries towards the EU and attempts to identify the main driving factors behind this process. In these regards, we first provide an overview of... more
This paper deals with the process of convergence of the Central and Eastern European (CEE) countries towards the EU and attempts to identify the main driving factors behind this process. In these regards, we first provide an overview of the real convergence through an analysis of several economic variables – rate of approximation of real GDP per capita and price levels, trade integration, harmonization of the economic structure and achievements in the labor market. In addition, we offer a formal econometric evidence on the main determinants of the convergence process, based on a panel data for 10 CEE countries during 2000-2015 period, estimated with fixed effects. The results of our study imply that higher savings and investment ratio, higher labour productivity, more efficient labour markets (lower unemployment) and macroeconomic stability (lower inflation and lower budget deficits) are conducive to real convergence. However, quite surprisingly, we find that the close trade integra...
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The paper provides for an empirical study of the association between fiscal decentralization and government size on a panel of 28 European developed and former transition countries during 1991-2011, controlling for the effects of various... more
The paper provides for an empirical study of the association between fiscal decentralization and government size on a panel of 28 European developed and former transition countries during 1991-2011, controlling for the effects of various demographic, institutional, and macroeconomic variables as well as for the effects of the Global Financial Crisis. The main findings from the empirical investigation are as follows: We provide evidence for non-negligible effects of expenditure decentralization on government size, especially in the former transition economies. However, when we employ the revenue decentralization as an explanatory variable we cannot provide support to the Leviathan hypothesis. We include two measures of the vertical fiscal imbalance and provide empirical support to the common-pool hypothesis only for the former transition countries. As for the effects of the control variables, our research results suggest that higher public debt leads to larger government, while trade...
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ABSTRACT Society's aversion to inflation, an outgrowth of financial sector development, has increased over time in twenty-eight excommunist countries, resulting in lower inflation.
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ABSTRACT This paper investigates the relationship between central bank independence (CBi) and inflation by using two different CBI measures in seventeen transition economies from central and Eastern Europe from 1990 to 2009. It employs a... more
ABSTRACT This paper investigates the relationship between central bank independence (CBi) and inflation by using two different CBI measures in seventeen transition economies from central and Eastern Europe from 1990 to 2009. It employs a fixed effects panel data model, which incorporates several control variables and accounts for possible autocorrelation in the residuals. The main finding of our empirical research is that central bank independence is negatively associated with inflation, even after controlling for the effects of other macroeconomic and institutional variables, such as the overall progress of liberalization. These results are broadly in line with the previous empirical findings in the literature.
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Theoretical conceptions offer ambiguous suggestions about the precise sign of the association between decentralization and inflation (positive or negative). Given the different channels in which decentralization affects macroeconomic... more
Theoretical conceptions offer ambiguous suggestions about the precise sign of the association between decentralization and inflation (positive or negative). Given the different channels in which decentralization affects macroeconomic stability, this relationship becomes a matter of empirical research. This paper provides empirical evidence on the association between decentralization and inflation on a panel of 11 former transition economies from Central and Eastern Europe (CEE) over the 1991-2011 period. The main findings from our empirical study suggest that decentralizing government activities in CEE countries is conducive with lower inflation rates. Also, we show that not only the extent of fiscal decentralization, but the composition of local revenue, too, matters for macroeconomic stability. Finally, we show that the relationship between fiscal decentralization and inflation is non-linear, i.e. initially, decentralization has favourable effects on macroeconomic stability, but a...
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ABSTRACT The main goal of the paper is to assess the impact of the global financial and economic crisis on Macedonia. Specifically, the paper addresses several mutually related issues: first, the condition of the banking sector; second,... more
ABSTRACT The main goal of the paper is to assess the impact of the global financial and economic crisis on Macedonia. Specifically, the paper addresses several mutually related issues: first, the condition of the banking sector; second, the situation in the real economy; third, the current account imbalances and; fourth, the reaction of the policy makers. The papers begins with an analysis of the structural and balance sheet characteristics of Macedonian banking sector, which protect it from the contagion effects of the global financial crisis. Here, we show that the low level of financial integration along with the conservative business policies of Macedonian banks have proved to serve as buffers against spill-over effects of the global financial turmoil. Then, we deal with the influence of the global recession on the economic activity in Macedonia, focusing on the main sources of the decline in the output. Given that Macedonia is a small open economy, the export behaviour and the overall developments in the current account form a central part of our analysis. Specifically, we show how the structure of the exporting sector increases the vulnerability of Macedonian economy to external shocks. The last part of the paper covers the response of the policy makers in fighting the recession, maintaining external equilibrium and preserving financial stability. Finally, the paper concludes with a discussion of the main future challenges for the policy makers in Macedonia with an emphasis on the sustainability of the fixed exchange rate.
ABSTRACT This paper examines the link between the central bank independece (CBI), the financial sector development and inflation in the 28 ex-communist economies during 1990-2010. The results obtained from our dynamic panel data model... more
ABSTRACT This paper examines the link between the central bank independece (CBI), the financial sector development and inflation in the 28 ex-communist economies during 1990-2010. The results obtained from our dynamic panel data model imply that, after controlling for the endogeneity of the CBI variable and other economic factors, the link between CBI, as an institutional arrangement, and inflation becomes insignificant. In addition, provide evidence that the financial sector development, known as financial opposition to inflation, is one of the most signifcant determinants in the disinflation process in transition economies. Specifically, we argue that the society's aversion to inflation, due to the financial sector development, has increased over time in these countries, leading to lower inflation.
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ABSTRACT This paper investigates the macroeconomic effects of monetary and fiscal policies in three South Eastern European economies: Croatia, Macedonia and Bulgaria. We employ recursive Vector Autoregressions (VARs) in order to study the... more
ABSTRACT This paper investigates the macroeconomic effects of monetary and fiscal policies in three South Eastern European economies: Croatia, Macedonia and Bulgaria. We employ recursive Vector Autoregressions (VARs) in order to study the interlinkages among fiscal policy, monetary policy and economic activity based on quarterly data on primary cyclically adjusted balance, monetary policy indicator, inflation rate and output gap. We obtain the following main results: first, domestic economic activity has significant effects on inflation, fiscal policy and, to some extent, monetary policy behavior; second, fiscal policy exerts limited influence on inflation and monetary policy; and third, the effects of monetary policy on inflation are rather modest.
ABSTRACT Standard economic theory states that, when monetised, budget deficits increase inflation. Also, this relationship is widely documented during many high inflation episodes throughout the world. In this paper, we study the... more
ABSTRACT Standard economic theory states that, when monetised, budget deficits increase inflation. Also, this relationship is widely documented during many high inflation episodes throughout the world. In this paper, we study the relationship between inflation and budget deficits in 17 countries from Central and Eastern Europe (CEE) during 1990-2009 by employing a fixed-effects panel data model. In addition, as a robustness check, our empirical model has been estimated controlling for the presence of autocorrelation in the residuals. The main finding from our exercise is that, after controling for the effects of several macroeconomic and institutional variables, we provide evidence for the negative relationship between inflation and fiscal balance in CEE countries.
The paper examines whether the introduction of hard peg in Macedonia in 1994, by itself, helped to fight the inflation. In that respect, I conduct an empirical analysis by regressing the inflation rate on several macroeconomic variables,... more
The paper examines whether the introduction of hard peg in Macedonia in 1994, by itself, helped to fight the inflation. In that respect, I conduct an empirical analysis by regressing the inflation rate on several macroeconomic variables, including a dummy covering the period of the peg. This exercise does not support the hypothesis that the peg alone is sufficient to combat inflation. Instead, macroeconomic fundamentals seem to be the underlying forces behind the disinflation process.
This paper surveys the theoretical and empirical literature on the coordination between monetary and fiscal policies. Recently, theoretical literature has been dominated by the Fiscal theory of the price level, which argues that fiscal... more
This paper surveys the theoretical and empirical literature on the coordination between monetary and fiscal policies. Recently, theoretical literature has been dominated by the Fiscal theory of the price level, which argues that fiscal policy plays at least equal role in the conduct of stabilization policy. Similarly, the game-theoretic approach appeals for a close coordination between the two policies, showing that the lack of coordination may result in over-reaction of the individual policy makers with suboptimal economic outcomes. Recently, the Global crisis has emphasized the ineffectiveness of traditional monetary policy tools with a strong message that, in deep recessions, part of the stabilization burden must be borne by fiscal policy. Yet, massive fiscal stimuli implemented throughout the world have raised some serious concerns about their macroeconomic consequences in the medium-term due to the sustainability of public debt, the crowding-out effects, and the behaviour of Ri...
Simultaneously with its monetary independence, Macedonia launched a heterodox money-based stabilisation programme that failed to end the four-digit inflation. Two years later, another attempt was made, relying on the exchange rate as a... more
Simultaneously with its monetary independence, Macedonia launched a heterodox money-based stabilisation programme that failed to end the four-digit inflation. Two years later, another attempt was made, relying on the exchange rate as a nominal anchor. Also, the stabilisation programme was supported by restrictive monetary policy, impressive fiscal consolidation and incomes policy. The second stabilisation programme was implemented in coherent way and, thus, it resulted in quick disinflation, reducing and keeping inflation to single-digit levels. At the same time, the economy began to recover gradually. However, the successful disinflation did not result in lower unemployment, nor it did improve the external balance of the country. In addition, some open issues remain for the future course of the stabilisation policy, associated with the interest rate policy, the need for greater exchange rate flexibility as well as the search for strong growth. Resolving these issues requires deep s...
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The main goal of the paper is to assess the impact of the global financial and economic crisis on Macedonia. Specifically, the paper addresses several mutually related issues: first, the condition of the banking sector; second, the... more
The main goal of the paper is to assess the impact of the global financial and economic crisis on Macedonia. Specifically, the paper addresses several mutually related issues: first, the condition of the banking sector; second, the situation in the real economy; third, the current account imbalances and; fourth, the reaction of the policy makers. The papers begins with an analysis of the structural and balance sheet characteristics of Macedonian banking sector, which protect it from the contagion effects of the global financial crisis. Here, we show that the low level of financial integration along with the conservative business policies of Macedonian banks have proved to serve as buffers against spill-over effects of the global financial turmoil. Then, we deal with the influence of the global recession on the economic activity in Macedonia, focusing on the main sources of the decline in the output. Given that Macedonia is a small open economy, the export behaviour and the overall d...
The experience from and recorded observations on economy stabilization programs implemented worldwide have clearly shown that there is sharp difference between the inflation dynamics during the implementation of such programs and the one... more
The experience from and recorded observations on economy stabilization programs implemented worldwide have clearly shown that there is sharp difference between the inflation dynamics during the implementation of such programs and the one during the post-stabilization period. In this context, it is observed that after the successful disinflation, the inflationary process can no longer be explained using the traditional variables provided by the standard theory of economy. Following these empirically established regularity phenomena, this paper explores the possibility of identification of the inflation process dynamics via of the system-theoretic, by means of both the traditional statistics and Box-Jenkins ARIMA methodologies. The application of this a theoretic approach is on the modelling of real inflation dynamics in Rep. of Macedonia in the post-stabilization period, second half of the 1990s.
This paper investigates the macroeconomic effects of monetary and fiscal policies in three South Eastern European economies: Croatia, Macedonia and Bulgaria. We employ recursive Vector Autoregressions (VARs) in order to study the... more
This paper investigates the macroeconomic effects of monetary and fiscal policies in three South Eastern European economies: Croatia, Macedonia and Bulgaria. We employ recursive Vector Autoregressions (VARs) in order to study the interlinkages among fiscal policy, monetary policy and economic activity based on quarterly data on primary cyclically adjusted balance, monetary policy indicator, inflation rate and output gap. We obtain the following main results: first, domestic economic activity has significant effects on inflation, fiscal policy and, to some extent, monetary policy behavior; second, fiscal policy exerts limited influence on inflation and monetary policy; and third, the effects of monetary policy on inflation are rather modest.