Is real depreciation or more government deficit expansionary? The case of Macedonia

Abstract

The paper finds that real depreciation of the denar reduces real GDP and that more government deficit spending as a percent of GDP raises real GDP. In addition, a lower world real interest rate, a higher lagged world real income, a lower real oil price or a lower expected inflation would increase real GDP. It suggests that the negative impact of real depreciation such as higher import costs and domestic inflation and less international capital inflows dominates the positive impact of real depreciation such as more exports.

Keywords

• currency depreciation
• government deficits
• world interest rates
• world income
• oil prices
• IS-MP-AS model