Nominal effective exchange rate neutrality: the case of Macedonia

Josheski, Dushko and Lazarov, Darko (2012) Nominal effective exchange rate neutrality: the case of Macedonia. CEA Journal of Economics, 7 (1). pp. 17-24. ISSN 1857-5250

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Abstract

urrently, the exchange rate regime in the Republic of Macedonia is what is refered to as a "managed float." The exchange rate of the denar is established on the basis of supply and demand of foreign exchange markets. The denar exchange rate against the euro serves as a fundamental of the Republic of Macedonia monetary policy. Money supply and interest rates are dictated by the exchange rate target. This paper uses Structural Vector Autoregression method to find empirical evidence for the nominal exchange rate neutrality concept for the case of macedonia. In particular, it examines whether Macedonian real GDP is neutral to changes in the nominal exchange rate as predicted by the macroeconomic theory. Baxter and Stockman (1988), found little evidence of systematic differences in the behavior of other macroeconomic aggregates or international trade flows under alternative exchange rate systems. This is contradictory to the claims that existed before this paper was published.1 This is known as Baxter-Stockman neutrality of exchange rate regime puzzle. In this paper we will test the neutrality of the nominal effective exchange rate. Germany is our biggest trade partner so in the SVAR model we test influence of German Real GDP relative to Macedonian Real GDP. This paper is divided as follows, Part 2 Theoretical and empirical literature on neutrality, here we set the theoretical foundations and empirical findings in this literature, in Part 3 we give data definitions and their sources, in Part 4 we set the SVAR model, in Part 5 we are interpreting the results from our models and in Part 6 we make conclusions.

Item Type: Article
Subjects: Social Sciences > Economics and business
Divisions: Faculty of Economics
Depositing User: Darko Lazarov
Date Deposited: 19 Aug 2014 14:24
Last Modified: 25 Aug 2014 09:09
URI: http://eprints.ugd.edu.mk/id/eprint/10663

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