This paper investigates the transmission of foreign shocks to economic activity and macroeconomic policies in three South
Eastern European (SEE) economies: Croatia, Macedonia and Bulgaria. Specifically, we provide empirical evidence on the influence
of several policy and non-policy shocks (euro area output gap, money market rate and inflation) on economic activity as well
as monetary and fiscal policies in the three countries. The main motivation behind our empirical investigation is the fact
that all of these economies are small open economies with rigid exchange rate regimes and different degree of integration
within the European Union. As for the methodological issues, we employ recursive vector autoregressions to identify the exogenous
shocks in the euro area. Generally, the estimated results imply that euro area economic activity has significant and relatively
strong influence on these economies where foreign output shocks are transmitted relatively quickly. The results also suggest
that the effects of foreign shocks are of larger magnitude in the countries that are more integrated with the EU. An additional
finding is that positive foreign interest rate shocks trigger a contractionary response of domestic monetary policy notwithstanding
the fact that domestic money market rates are not linked with euro area interest rates. Finally, euro area inflation is instantly
transmitted to domestic inflation. We can explain these effects by several factors, such as: the fixed exchange rates, the
relatively high trade integration of SEE economies within the euro area as well as the dependence of SEE banks on foreign
financing.
Forschungsbereich:Makroökonomie und öffentliche Finanzen