Fiscal or Monetary Dominance in a Small, Open Economy with Fixed Exchange Rate – The Case of the Republic of Macedonia

Taking into account the specific features of the Macedonian economy, as a small, open economy with a fixed exchange rate, the goal of this research is to contribute to the discussion of whether countries with such characteristics are under monetary or fiscal dominant regime and whether the dominance has changed over time and why. We use a recursive VAR model to determine whether budget balances in Macedonia were set exogenously and independently from public sector liabilities in the period 2000-2011. The results show that the cyclically adjusted balance of central government does not significantly respond to the public debt changes. Thus the basic conclusion is that in the analyzed period, a little attention is paid to the level of public liabilities (public debt) in setting current discretionary fiscal policy, indicating that fiscal policy can undermine the goal of monetary policy and that it dominates over monetary policy