MONETARY RESPONSE TO THE GLOBAL ECONOMIC CRISIS IN A SMALL, OPEN ECONOMY WITH FIXED EXCHANGE RATE - THE CASE OF THE REPUBLIC OF MACEDONIA

Abstract

The global economic crisis imposed one of the most significant challenges for the conduct of monetary policy, which forced monetary authorities throughout the world to reach the limits of their conventional instruments and implement new sets of measures for exit of the crisis. The situation created by the global crisis presented an especially interesting challenge, not only for developed economies, but also for small economies with fixed exchange rate, which were supposed to survive this economic storm without having their anchors blown away by the “strong windâ€. The Macedonian economy is an example of a small open economy, highly intergrated in trade, which for a longer period maintains the fixed exchange rate as a best suited monetary regime for sustaining a stable macroeconomic environment. The monetary authority (NBRM) successfully responded to the challenges of the global economic crisis despite the specific characteristics of the Macedonian economy and the monetary regime which limits its response. Thus, we found a special challenge in elaborating and analyzing the response of the Macedonian monetary authority to the global crisis. The elaboration of the undertaken measures can be a solid ground and a guide for the creation of monetary policy in small open economies with a fixed exchange rate.The paper is structured as follows: the first section elaborates the transmission of the economic crisis; the second section focuses on the general picture of the monetary resonse; the third section analyses the monetary authority’s response at the beginning of the global crisis, when it reacted with a monetary tightening; the fourth section elaborates the monetary policy response in the peak of the crisis, characterized by monetary relaxation; the fifth section presents the macroprudential measures implemented for fighting the crisis and the last section gives summarized conclusions about the monetary response to the crisis.