Pavle Petrović

Exchange Rate and Trade Balance: J-curve Effect

This paper shows that exchange rate depreciation in Serbia improves trade balance in the long run, while giving rise to a J-curve effect in the short run. These results add to the already existent empirical evidence for a diverse set of other economies. Both Johansen’s and autoregressive distributed lag approach are respectively used giving similar long-run estimates showing that real depreciation improves trade balance. Corresponding errorcorrection models as well as impulse response functions indicate that, following currency depreciation, trade balance first deteriorates before it later improves, i.e. exhibiting the J-curve pattern. These results are relevant for policy making both in Serbia and in a number of other emerging Europe countries as they face major current account adjustments after BoP crises of 2009.

The monetary dynamics in the Yugoslav hyperinflation of 1991–1993: The Cagan money demand

Abstract The Yugoslav hyperinflation of 1991–1993 is one of the highest and the longest episodes ever recorded. The monetary dynamics of the hyperinflation is well characterized by the Cagan model. With revealed cointegration between real money and inflation, the model is accepted irrespective of the underlying expectations formation process and it implies stationary velocity shocks. Employing cointegrated VAR, the exact rational expectations Cagan model is rejected and an informal test within the same framework shows that the Yugoslav public exhibited a lower degree of forward-looking behavior relative to that in other classical hyperinflations. This enabled the government to extract non-decreasing seigniorage by increasing money growth and inflation above expected rates and suggests an explanation for the ever-increasing money growth in spite of the resulting monetary chaos.

Monetary accommodation in transition economies: econometric evidence from Yugoslavia's high inflation in the 1980s

A conjecture, advanced by some ad hoc evidence and the theory that money accommodates wage inflation in transition economies, is tested and accepted for Yugoslavias high inflation of the 1980s. Within a cointegration framework, an overidentified long-run structure is estimated and accepted, where money is cointegrated with wages while not with prices. Furthermore, two independent common stochastic trends emerge, suggesting that aggregate supply shocks (i.e. those to wages and prices) and exchange rate shocks were driving Yugoslavias high inflation, while the impact of money supply shocks was transitory. These results are due to the presence of soft budget constraint where money passively validated wage and price decisions, and to the Yugoslav debt and balance of payments crises in the 1980s which triggered exchange rate shocks. The results on the role of aggregate supply shocks might bear general relevance for transition economies.

Comment on Frenkel and Taylor's "Money Demand and Inflation in Yugoslavia, 1980-1989"

Abstract A modified Cagan model, stating that real money and inflation are cointegrated, has been previously estimated for a number of high inflation episodes but, however, the wide dispersion of money demand semielasticity was obtained. This comment questions the ability of the model to explain such diverse inflation episodes by showing that it does not hold in the extreme case of Yugoslavia, that is one of the lowest inflation and the highest semielasticity obtained. Thus, an alternative econometric evidence is supplied, indicating that cointegration is not present. The former is strongly backed by the economic evidence advanced that inflation might have a structural break. Upon testing, stationarity with a structural break is obtained, hence explaining the absence of the cointegration.

Fiscal Multipliers in Emerging European Economies

Filling the evidence gap on the size and variations of fiscal multipliers in developing countries, and contributing to the debate on the fiscal transmission mechanism, we found that the government spending multipliers in emerging Europe are (i) higher than in developing countries and at lower end of those in developed countries; (ii) the fiscal multiplier is large under fixed exchange rate and close to zero under floating and this is related to different monetary policy stance across regimes; (iii) the multiplier substantially increases in the Great Recession relative to pre-crisis expansion; (iv) upon government spending shock private consumption increases under both exchange rate regimes, in downturn and expansion, and hence in the over-all sample, thus mimicking the corresponding pattern of spending multipliers, and hence supporting predictions of traditional and new Keynesian models rather than those of neoclassical ones.

Price distortion and income dispersion in a labor-managed economy: Evidence from Yugoslavia

Abstract Although the standard literature on a labor-managed economy implies price distortions and spillovers of profits into wages, the evidence obtained for the Yugoslav economy does not support these predictions. In particular, price distortions in the mid-1970s are found to be small. Price deviations estimated by means of linear price models permit the calculation of excess profits and permit testing of whether they spill over into incomes. Again, contrary to what the standard theory predicts, only a small fraction of such profits is transferred into incomes.