The effect of imported EU inflation on Macedonian inflation – a cointegration approach
Journal
Annual of the Faculty of Economics – Skopje, Volume 57
Date Issued
2022
Author(s)
Abstract
Inflation has become one of the most important challenges in a world
that is still recovering from the pandemic, and it is suffering the consequences
from the conflict between Ukraine and Russia. Pandemic restrictions,
bottleneck pressures in supply chains, jump in energy prices – these are all
causing the inflation to rise, and slowing the recovery of many economies
globally.
This paper investigates the foreign drivers of national inflation using
the cointegration approach and the Vector Error Correction Model. It tends to
prove that there is long-term relationship between the national inflation and
the inflation in the European Union. This is understandable, having in mind
that North Macedonia is small and open economy, dependable on imports of
food, energy, and other products.
The impulse response function estimated in the model confirm that
shocks in EU inflation have significant and long-term implication on the
national inflation. The effect from the shock starts in the first month and it
pertains throughout the observed period of 12 months, reaching its maximum
of 0.7315 percentage points. This is a clear indicator that every shock that
occurs in the inflation in the European Union almost immediately transfers
to the national inflation. Forecasts of the model predict steady increase in the
national inflation rate, ending the year 2022 with 14.8%.
The existence of this relationship should be important guideline to
policy makers, who should be aware of the significant foreign impact. They
should create appropriate and timely policy consisted of monetary, fiscal,
social, and other measures that could fight the rising inflation in more effective
manner.
that is still recovering from the pandemic, and it is suffering the consequences
from the conflict between Ukraine and Russia. Pandemic restrictions,
bottleneck pressures in supply chains, jump in energy prices – these are all
causing the inflation to rise, and slowing the recovery of many economies
globally.
This paper investigates the foreign drivers of national inflation using
the cointegration approach and the Vector Error Correction Model. It tends to
prove that there is long-term relationship between the national inflation and
the inflation in the European Union. This is understandable, having in mind
that North Macedonia is small and open economy, dependable on imports of
food, energy, and other products.
The impulse response function estimated in the model confirm that
shocks in EU inflation have significant and long-term implication on the
national inflation. The effect from the shock starts in the first month and it
pertains throughout the observed period of 12 months, reaching its maximum
of 0.7315 percentage points. This is a clear indicator that every shock that
occurs in the inflation in the European Union almost immediately transfers
to the national inflation. Forecasts of the model predict steady increase in the
national inflation rate, ending the year 2022 with 14.8%.
The existence of this relationship should be important guideline to
policy makers, who should be aware of the significant foreign impact. They
should create appropriate and timely policy consisted of monetary, fiscal,
social, and other measures that could fight the rising inflation in more effective
manner.
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