Abstract
Applying the IS-MP-IA model to study the impacts of exchange rate movements, expansionary fiscal policy and other relevant variables in Serbia, we find that real appreciation of the dinar, a higher government deficit-to-GDP ratio, a lower real lending rate in the euro area, a lower lagged real oil price, a higher Germany’s real GDP and a lower expected inflation rate would promote economic growth.
Highlights
There are strengths and weaknesses in Serbia’s economy
Applying the IS-MP-IA model to study the impacts of exchange rate movements, expansionary fiscal policy and other relevant variables in Serbia, we find that real appreciation of the dinar, a higher government deficit-to-GDP ratio, a lower real lending rate in the euro area, a lower lagged real oil price, a higher Germany’s real GDP and a lower expected inflation rate would promote economic growth
The real lending rate in the euro area is selected to represent the world real interest rate as monetary policy conducted by the European Central Bank is expected to affect monetary policy of the National Bank of Serbia
Summary
There are strengths and weaknesses in Serbia’s economy. The 2.8% growth rate of real GDP in 2016 ranked the best since 2009. Based on a sample of 11 East European countries during 1990.M1 – 2005.M6, BahmaniOskooee and Kutan (2009) study the impact of currency depreciation on the balance of trade and reveal that the J-curve effect is found to exist in Bulgaria, Croatia and Russia. It suggests that after currency depreciation, their trade balance would deteriorate in the short run and improve in the long run. Kurtovic, Halili, and Maxhuni (2017) find that in the import demand function, a J-curve effect in the short term was found for Serbia’s bilateral trade with Croatia, Germany and Italy. This paper differs from previous studies because it applies the IS-MP-IA model (Romer, 2000; 2006) and employs an advanced econometric methodology to estimate regression parameters
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