Determinants of Inflation in a Fully Euroized Regime: Dynamic Evidence from Montenegro (2008–2025)

Abstract This paper examines the key determinants of inflation in Montenegro under conditions of full euroization during the period 2008–2025. Despite the extensive theoretical and empirical literature on inflation, the role of domestic and external factors affecting inflation in small euroized economies remains insufficiently explored, particularly with regard to the aggregate demand transmission channel and the fiscal impulse in the case of Montenegro. The analysis is based on a regression specification using annual data, including lagged inflation, real GDP growth, euro area inflation (HICP), changes in oil prices, and the fiscal impulse measured as the change in the primary balance expressed as a percentage of GDP. The findings indicate that imported inflation from the euro area is strongly associated with domestic price dynamics, although the empirical specification does not allow strict separation between imported inflation effects and common global shocks. Although the fiscal impulse displays a positive sign, it does not exhibit stable statistical significance across different model specifications and robustness checks. The empirical results suggest that inflation in Montenegro, as a small and open euroized economy, is largely driven by external factors, while the inflationary effect of fiscal policy through the aggregate demand channel remains inconclusive and sensitive to model specification.