Interactions of Monetary Policies in South East Europe in a European Monetary Union Context. A Global-Vector Autoregressive Model.

This thesis discusses the interactions of monetary policies in the South-eastern European Countries (SEEC) in a European Monetary Union (EMU) context, by modelling via a Global Vector Autoregressive Model (G-VAR) the interdependencies arising between the member states and the related financial institutions in the region. The EMU and its relation to monetary or economic policy interactions has been heavily and effectively researched by numerous researchers including, indicatively, the Nobel laureate Mundell (1961) who theoretically and empirically considered and examined the effects of monetary and fiscal policies coordination on real output, interest rates and exchange rates with the aim of increasing the benefits that could arise from an optimum currency area (OCA). A G-VAR model for South-Eastern Europe (SEE), however, has not been applied and foreign exchange reserves have not yet been considered within such a contextual framework. There is a gap to fill in on the theoretical and empirical relation of the aforementioned variables using econometrics and we will do so by using a multi-simultaneous equations system with weak exogeneity, i.e. a G-VAR. The incorporated variables are: the foreign exchange reserves, the real effective exchange rate (REER), the growth approximated by the industrial production index (IPI) and the monetary policy which is quantified through interest rates and specifically by the money and market rate. The variables that will be treated as weakly exogenous within the GVAR system are the Euribor and the EMU Real Effective Exchange Rate. The frequency of the data is monthly and covers the period from 2002 to 2016. The analysis is conducted with the use of secondary data which is acquired through publicly available published data and reports from Central Banks, the European Central Bank (ECB), Eurostat, OECD, BIS, IMF and the World Bank. The European Countries that are considered are Bulgaria, Croatia, FYROM, Greece, Romania and Slovenia. The European Monetary Union and its role are captured by the related interest rate, i.e. Euribor, and the Real Effective Exchange rates of EMU members as a whole. The main task of the project is to capture the transmission mechanism −from the monetary to real economy− by considering the role of foreign exchange reserves in the case of SEE countries. This adds to the understanding of the economic policy effect on nominal and real variables, suggests a better macroeconomic policy design and adds to the efficiency of the implementation of monetary policy that captures complexities that are related to an Optimum Currency Area (OCA). On top of the above the EMU REER helps us in understanding the existing and dynamically changing competitive related interlinkages that exist between the investigated variables.