Department of Economics and Business Economics

The Transmission of Foreign Shocks to South Eastern European Economies

Research output: Working paperResearchpeer-review

  • Goran Petrevski, University Ss. Cyril and Methodius, Macedonia, The Former Yugoslav Republic of
  • Jane Bogoev, National Bank of Republic of Macedonia, Macedonia, The Former Yugoslav Republic of
  • Dragan Tevdovski, Denmark
This paper investigates the transmission of foreign shocks to economic activity and macroeconomic policies in the South Eastern European (SEE) economies with fixed exchange rate regimes: Croatia, Macedonia and Bulgaria. Specifically, we provide empirical evidence on the influence of the EMU policy and non-policy shocks (the output gap, the money market rate and the inflation rate in the euro-zone) on monetary and fiscal policies and economic activity in the analysed countries. The main motivation behind our empirical investigation is the fact that all of these economies are small open economies with rigid exchange rate regimes, with different degree of integration within the EU. As for the methodological issues, we employ recursive Vector Auto regressions to identify the exogenous shocks in the euro-area. Generally, the estimated results imply that euro-zone economic activity has significant and relatively strong influence on SEE economies and these external shocks are transmitted relativity quickly. Moreover, the results also suggest that the effects of exogenous shocks are more persistent if the domestic economy is more integrated with the EU. An additional finding is that shocks in the foreign reference rate are relatively quickly transmitted to domestic money market rates. We can explain these effects by several factors, such as: the fixed exchange rates, the relatively high integration of SEE financial markets to EMU financial markets as well as the dependence of banks on foreign financing. Finally, euro-zone inflation does not have a significant influence on domestic inflation, which might indicate that inflaction in SEE economies is mostly driven by idiosyncratic shocks.
Original languageEnglish
Number of pages37
Publication statusPublished - 2014
SeriesEconomic Systems

    Research areas

  • Monetary policy, Vector autoregression, Exogenous shocks

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