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The effects of macroeconomic policies under fixed exchange rates: A Bayesian VAR analysis

Tevdovski, Dragan and Petrevski, Goran and Bogoev, Jane (2016): The effects of macroeconomic policies under fixed exchange rates: A Bayesian VAR analysis.

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Abstract

We analyse the effects of fiscal and monetary policies in two South Eastern European (SEE) economies with currency pegs (Croatia and Macedonia) estimated by the Bayesian Vector Autoregression. The main results of the study are as follows: Fiscal tightening leads to economic expansion in Macedonia and a decline in economic activity in Croatia. In both countries fiscal tightening leads to a decline in inflation and money market rates. Monetary tightening leads to output contraction and a decline in inflation in both countries. We find opposite reaction of fiscal authorities to a monetary shock: monetary contraction is accompanied by fiscal tightening in Croatia and by loose fiscal policy in Macedonia.

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