Challenges of macroeconomic stability: a speed limit on Croatia's accession to the european Union?

Dubravko Mihaljek ()

Chapter 2 in Croatian Accession to the European Union: Institutional Challenges, 2004, vol. 2, pp 21-47 from Institute of Public Finance

Abstract: This paper analyses three issues that could potentially affect macroeconomic stability and hence the speed of Croatia’s accession to the European Union (EU): (i) Can the economy continue to rely on domestic demand as the main source of growth or is stronger reliance on exports necessary in the medium term? (ii) Is the external current account deficit in Croatia “excessive” and how have high deficits been corrected in the past? (iii) Does the expansion of bank credit to the private sector carry the seeds of macroeconomic instability? The paper argues that clearer signs of healthier growth have emerged since 2000, and that the Croatian economy should be able to adjust to the widening external deficit in 2002–03 in an orderly manner. However, there are reasons to be concerned about the expansion of private sector credit, as recently it has been financed largely by foreign borrowing. Large capital inflows are likely to become the main challenges for macroeconomic policy in the run-up to Croatia’s EU accession. Policy makers will in particular have to address the so-called “Tošovský dilemma”, i.e., set interest rates at an appropriate level: setting them too high would invite excessive short-term inflows, while setting them too low would lead to excessive investment and thus inflation.

Keywords: Croatian economy; enlargement of the European Union; transition economies; macroeconomic stability; economic growth; current account reversals; bank lending; banking system vulnerability; capital inflows (search for similar items in EconPapers)
Date: 2004
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