EXCHANGE RATE REGIMES AND FINANCIAL RESILIENCE: A COMPARATIVE ANALYSIS OF NORTH MACEDONIA AND TURKEY
Vjollca HASANI-LIMANI, Ercan ÖZEN
Abstract
In this paper we study the financial stability and resilience of two emerging economies with contrasting exchange rate regimes, in such a comparison not studied before, North Macedonia and Turkey. North Macedonia has maintained a long-term peg to the euro, aiming for economic stability but limiting monetary flexibility, while Turkey’s flexible exchange rate regime allows for greater policy discretion and higher volatility.
Using quarterly data from 2010 to 2024, from relevant international and domestic financial institutions, we employ the VAR models augmented with global exogenous factors (VARX), to analyze the relationships between the real effective exchange rate, the current account balance, foreign reserves, and financial indicators. Through impulse response analysis, we found different transmissions of the external shocks, such as price changes and interest rate to these two economies.
Moreover, their response was different, while our results show that North Macedonia’s fixed exchange rate regime ensures short-term stability of the denar but increases its sensitivity to external imbalances, while Turkey’s flexible exchange rate allows for faster adjustment to the costs of the volatility of the Turkish lira exchange rate. Our findings show that no single exchange rate regime fully protects economies from global shocks, and therefore resilience depends on the good management and coordination between monetary and fiscal and overall macroprudential policies. This paper contributes to the debate on exchange rate strategies in emerging economies and their implications for stability, linking monetary policy, financial openness and external balance.
Pages: 124 - 137