Dynamic regression analysis reveals external price shocks drive domestic inflation in a fully euroized economy, highlighting limited domestic fiscal policy control over price dynamics.
Key Points
To identify the domestic and external macroeconomic determinants of inflation in Montenegro under a regime of full euroization from 2008 through 2025.
Analyzed annual macroeconomic time-series data from Montenegro covering the 2008–2025 period using dynamic regression modeling.
Regressed domestic inflation on lagged inflation, real GDP growth, euro area harmonised index of consumer prices (HICP), oil price fluctuations, and the fiscal impulse measured as the change in primary balance as a share of GDP.
Imported inflation from the euro area displayed a strong positive association with domestic price movements.
Fiscal impulse demonstrated a positive coefficient but lacked stable statistical significance across alternative regression specifications and robustness checks.
Domestic price dynamics were predominantly driven by external foreign shocks rather than domestic aggregate demand channels.