OPENNESS OF THE CAPITAL MARKET IN MACEDONIA
AbstractMacedonia is a small relatively open economy and its interest rate policy is very much linked to its exchange rate policy. The more integrated it became with the international financial market the more the interest rate pol- icy will be dependent on the exchange rate regime.One reason to analyze the behavior of the interest rate level in Macedonia is the differential between the interest rates in Macedonia and the Euro zone. In accordance with the uncovered interest rate parity, the more open the economy is the domestic interest rate should be converging to the Euro zone interest rate. If the difference, i.e. the parity spread, is high in an environment of integrated financial sector and Macedonia and still experienc- ing high interest rates, then the differential may be explained as a premium for the expectation of future depre- ciation and/or devaluation of the Macedonian Denar. Explanation then might be that there exist a misalignment within the fixed exchange rate regime in Macedonia thus, creating incentives for the market to expect depreci- ation/devaluation. The type of expectation (whether they are rational or adaptive) is very important, as shown in this paper.
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