EVALUATING FISCAL REFORM EFFECT ОN INFLATION: DIFFERENCE IN DIFFERENCES INSIGHTS FROM 'Europe Now!' IN MONTENEGRO

This paper examines the economic impact of Montenegro’s fiscal program, Europe Now!, implemented in 2022, using a Difference-in-Difference (DiD) approach. The program, aimed at increasing wages and stimulating economic growth, is evaluated for its contribution to inflation dynamics between Montenegro and the Euro Area. Leveraging monthly inflation rate data from 2011 to 2025, the study estimates that Europe Now! caused an additional 2.6 percentage point increase in inflation in Montenegro during the post-intervention period, compared to the Euro Area. While Montenegro's inflation remained persistently high the program’s relative contribution to inflation was modest, especially when compared with the substantial increase in average wages. Robustness checks and model diagnostics affirm the validity of these findings. Additionally, a nonparametric bootstrap methodology provided reliable confidence intervals for the DiD coefficient, yielding a 95% interval of (0.609, 4.430). This further substantiated the statistical significance of the program’s inflationary impact while accounting for non-normal residual distributions. A placebo test, employing a fictitious pre-treatment year (2015), confirmed that the observed effects were specific to the intervention in 2022 and not driven by spurious patterns or preexisting trends. The study highlights the trade-off inherent in fiscal reforms, demonstrating that the Europe Now! program successfully boosted wages substantially while contributing a relatively small, manageable rise in inflation. These findings underscore the importance of robust econometric techniques in evaluating policy impacts and provide a framework for analyzing similar fiscal interventions in other contexts.