Research purpose. The purpose of this paper is to examine the efficiency of the transmission mechanism of the monetary policy in a banking system with excess liquidity. More specifically, it aims to examine how the interest rates of the central bank bills and inflation rate affect total lending and the overall economic activity in the country. For this purpose, the analysis is based on the case of the Republic of North Macedonia, whose banking system has exhibited excess liquidity in the past decade. Design / Methodology / Approach. The paper is based on two different VECM models, analyzing the impact of the central bank bills interest rates and the inflation rate, on lending and real GDP in the Republic of North Macedonia, for the period 2000 – 2019. The analysis also encompasses unit root tests for the variables of interest in order to determine their order of integration and choose appropriate statistical methods. The short-run causality is assessed using the Granger causality test, whereas the existence of the potential long-run relationship is examined using the Johansen cointegration test. In addition, in order to determine the magnitude of the mutual relationship, variance decomposition is employed in both estimated models. Moreover, the stability of the models when exposed to external shocks is observed through their impulse response functions. Findings. Conducted analysis shows the negative long-term impact of the central bank bills interest rates on lending and real GDP in North Macedonia. However, no statistically significant impact in this regard is found in the short run. Opposingly, the inflation rate negatively affects lending and real GDP in North Macedonia in the short run, whereas, in the long run, it does not have a statistically significant impact. Originality / Value / Practical implications. Unlike many other studies in this area, this paper provides practical guidance for the monetary authorities in countries with excess liquidity in the banking system. Namely, its findings imply that central banks should reduce the interbank rate when faced with crises that cause liquidity disparities between banks. Failure to reduce interest rates during the crisis disrupts financial stability, which causes banks to withhold investing their liquid assets in the real economy.
According to economic theory, the money supply positively affects economic growth, especially in the short run. Additionally, for small and open economies, the openness of the economy plays a crucial role in economic growth. Therefore, the subject of this paper is the impact of the money supply, measured through the broad money aggregate (M3), and trade openness of the country on the economic growth in North Macedonia. M3 aggregate is taken as an indicator of the financial sector development, whereas on the other hand, the trade-to-GDP ratio is an indicator for the openness of the economy. The research is employing the Vector Autoregression (VAR) model, and quarterly data for the period 1995-2019 are used. As opposed to the economic theory, the results show the absence of a long-run relationship between GDP, broad money, and trade openness in North Macedonia for the observed period. Also, in the short run, M3 and trade openness have a significant positive impact on GDP. Additionally, there is no noticeable time gap in the above relationships. Namely, the impact of broad money and trade openness on GDP in North Macedonia is not much stronger after a significant time lag from the impact in the first year. This put into question the capability of the monetary policy as a tool of the broader macroeconomic policy to shift the aggregate demand curve upwards and boost economic activity.
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