Fiscal and monetary policy effects in three South Eastern European economies

This paper investigates the macroeconomic effects of monetary and fiscal policies in three South Eastern European economies: Bulgaria, Croatia and Macedonia. We employ recursive vector autoregressions in order to study the linkages among fiscal policy, monetary policy and economic activity based on...

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Bibliographic Details
Published in:Empirical economics 2016-03, Vol.50 (2), p.415-441
Main Authors: Petrevski, Goran, Bogoev, Jane, Tevdovski, Dragan
Format: Article
Language:English
Subjects:
Business cycles
Econometrics
Economic activity
Economic Theory/Quantitative Economics/Mathematical Methods
Economics
Economics and Finance
Expenditures
Finance
Fiscal policy
Foreign exchange rates
Inflation
Insurance
Interest rates
Macroeconomics
Management
Monetary policy
Statistics for Business
Studies
Transition economies
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Summary:This paper investigates the macroeconomic effects of monetary and fiscal policies in three South Eastern European economies: Bulgaria, Croatia and Macedonia. We employ recursive vector autoregressions in order to study the linkages among fiscal policy, monetary policy and economic activity based on quarterly data on primary cyclically adjusted balance, monetary policy indicators, inflation rate and output gap. We obtain the following main results: first, domestic economic activity exerts significant effects on inflation, provoking a strong reaction of monetary policy, especially in case of procyclical or erratic behavior of fiscal policy; second , we find evidence for the expansionary effects of fiscal consolidation since fiscal tightening leads to an increase in economic activity; third, the effects of monetary policy on output and inflation are generally as expected; fourth , monetary policy acts as a strategic substitute to tight fiscal policy, while in case of monetary tightening, fiscal authorities behave in a countercyclical manner.
ISSN:0377-7332
1435-8921
DOI:10.1007/s00181-015-0932-0