The transmission of external shocks to the Macedonian economic activity

Macroeconomists have been concerned with the structure of business cycle fluctuations and their sources for a long time. In a highly integrated and globalized world, the study of co-movement, or integration, is important because the results of the study on emerging countries could help policy-makers design more appropriate policies for those countries. In this study, we are trying to answer how much of economic volatility in Macedonia can be explained by shocks originating in the Euro area, as main trading partner and world prices and what is the dynamic response of Macedonian GDP to a such shocks. To examine this, we are estimating three variable recursive SVAR models. The results from the basic estimated model, as well as the models in the sensitivity analysis, show that only small portion of domestic GDP variation can be explained by foreign demand, whereas the prices have limited contribution. Impulse response also confirms these findings, as domestic GDP has statistically significant response to foreign demand shock, while world prices shock has no significant effect.