Sustainability of the Macedonian Current Account

Most of the emerging European countries, including Republic of Macedonia, are faced with greater or smaller current account deficits, which raise the concern about their sustainability in the long run. This working paper examines the sustainability of the Macedonian current account deficit using the structural model of the current account. According to this model, the current account is viewed as the outcome of variations in macroeconomic "structural" determinants that influence the saving-investment balance. The results show that budget deficit, economic growth, FDI and financial intermediation are the variables that had an effect on the Macedonian current account in the period 1998-2009, and that the sustainable level of the current account deficit is in the range of 5.3%-9.1% of GDP. The current account deficit was fluctuating around this sustainable level most of the time, which indicates that external equilibrium was not jeopardized. However, in the period between the last quarter of 2007 and the first quarter of 2009, due to the two external shocks in this period (the global increase of prices and the global recession), the current account deficit was higher than the sustainable level, which suggested a violation of the external equilibrium. Although the equilibrium was restored later in 2009, this historical episode points out the need for structural reforms in the Macedonian economy in order to avoid repeating such episodes in the future

The Optimal Level of Foreign Reserves in Macedonia

During the last two decades the emerging countries have experienced an upward trend in reserve accumulation. However, high level of foreign reserve assets implies certain costs. Consequently, given the trade-off between the benefits and the costs of holding reserves, there are issues related to the adequacy of the current level of reserves. In this analysis we make an effort to assess the optimal level of the official foreign reserves in Macedonia. The estimation of the optimal level of foreign reserves is based on cost-benefit welfare model as in Jeanne and Ranciere (2011), in which reserves serve as an insurance for the economy and have two roles - to mitigate the negative effects of a capital account crisis (sudden stop) and to prevent future crisis. The model that captures the benefit of holding reserves as self-insurance assumes an exogenous probability of crisis. This basic model shows that the actual level of official reserve assets is above the level for crisis mitigation. In case when reserves are held not only for crisis mitigation purposes, but also for crisis prevention, the probability of crisis is endogenous and depends on the level of reserves. This extended model, which is more suitable for Macedonia regarding the exchange rate regime, shows optimal level of reserves that is still below, but close to the official foreign reserves in recent years

Price and Income Elasticities of Export and Import and Economic Growth in the case of the Republic of Macedonia

The purpose of this empirical research is estimation of the long-term price and income trade elasticities and their practical application in Thirlwall's economic growth model in the case of the Republic of Macedonia. The estimation is based on ARDL modeling, as one of the most used procedures for testing the cointegrating relationship between variables. The results confirm the existence of long-term relationship between export and import demand and relative prices and income. There is an evidence for high import elasticity on domestic income changes and relatively significant export elasticity to changes in the world income. The estimated price elasticities are lower, with the imports being more sensitive on price variations than the exports. In other words, domestic economic agents are more sensitive to price changes than foreigners are. The higher income elasticity of import than the income elasticity of export points out the trade balance deterioration. Practical application of the estimated income elasticity of import in the Thirlwall's economic growth model shows that the growth rate of the Macedonian economy is determined largely by balance of payment constrains, or it depends on export growth rate and significantly is reduced by high income elasticity of import

The transmission of external shocks to the Macedonian economic activity

Macroeconomists have been concerned with the structure of business cycle fluctuations and their sources for a long time. In a highly integrated and globalized world, the study of co-movement, or integration, is important because the results of the study on emerging countries could help policy-makers design more appropriate policies for those countries. In this study, we are trying to answer how much of economic volatility in Macedonia can be explained by shocks originating in the Euro area, as main trading partner and world prices and what is the dynamic response of Macedonian GDP to a such shocks. To examine this, we are estimating three variable recursive SVAR models. The results from the basic estimated model, as well as the models in the sensitivity analysis, show that only small portion of domestic GDP variation can be explained by foreign demand, whereas the prices have limited contribution. Impulse response also confirms these findings, as domestic GDP has statistically significant response to foreign demand shock, while world prices shock has no significant effect

Disaggregating Okun’s Law: A Case-Study for Macedonia

Okun’s law is one of the most widely-known stylized facts in the macroeconomic literature and policy. In this paper we study several aspects of Okun’s law in Macedonia between 2004 and 2016. Aggregate indicators show a link between output and unemployment that is in line with other emerging markets and regional peers. We also find that the relationship has been somewhat weaker in recent years, which might be related to the recent job-intensive growth in the wake of structural reforms after the global financial crisis and particularly the subsequent European debt crisis. When investigating whether various expenditure components of GDP may cause different unemployment reactions, an important issue that has not been sufficiently addressed in the literature, we find that domestic demand has a stronger effect. We also provide several robustness checks to our main findings, and illustrate how they might be used to improve forecasting

Transmission of External Shocks in Assessing Debt Sustainability, the Case of Macedonia

In the analysis of public and external debt sustainability the National Bank of the Republic of Macedonia is actively using the IMF's Debt Sustainability Analysis (DSA) framework. The aim of our analysis is to improve the analytical power of the IMF's DSA framework, in the case of Macedonia. This paper uses simple framework, based on methodology used in Adler and Sosa (2013), that integrates econometric estimates of the effect of global factors on key domestic variables that determine public and external debt dynamics, within the IMF's standard debt sustainability framework. VAR estimation is used in obtaining the forecasts of key domestic variables, conditional on a set of assumed global variables under different global shock scenarios. The results in general suggest that under all shock scenarios, there is negative effect to domestic GDP, however in the case of current account there is negative effect in the beginning of the period of applied shocks, but positive in the later period. Consequently, the expected effect to public debt sustainability is negative for the whole period due to lower real GDP growth. However, regarding external debt sustainability, negative effect is expected in the first year or two due to lower GDP growth and higher current account deficit, yet, in a medium run, external sustainability might not be jeopardized as the lower GDP growth might be neutralized by the lower current account deficit