The Impact of the Financial Crisis and Policy Responses in Croatia

Nikola Bokan, Lovorka Grgurić (), Ivo Krznar and Maroje Lang ()
Additional contact information
Lovorka Grgurić: The Croatian National Bank, Croatia

No 22, Working Papers from The Croatian National Bank, Croatia

Abstract: We conduct simulations of the impact of the financial crisis on the Croatian economy using the newly developed DSGE model for Croatia. The impact of the crisis is modeled by proxying it with two distinct shocks: an increase in the foreign interest rate (cost of foreign borrowing) and a drop in export demand. Furthermore, we introduce a monetary policy response in the form of regulatory requirement reduction. The results to a large extent match the actual data, confirming the early impact of the crisis. More precisely, the financial crisis led to a significant slowdown in real activity, international trade and financial aggregates. Real activity is in decline, despite significant monetary policy response. With a monetary policy regime based on a stable exchange rate, the central bank is limited in its attempt to counter the impact of foreign shocks and significantly stimulate real activity by adjusting the regulatory framework. By decreasing the regulatory burden and thereby increasing bank liquidity, the CNB has managed to offset the negative impact of foreign shock(s) only partially and to a small extent. However, this limited success must be evaluated in the context of a highly euroized small open economy, where the primary goal of the monetary authority is to keep the exchange rate broadly stable.

Keywords: small open economy; financial crisis; euroization (search for similar items in EconPapers)
JEL-codes: C61 D50 E58 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2009-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.hnb.hr/repec/hnb/wpaper/pdf/w-022.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hnb:wpaper:22

Access Statistics for this paper

More papers in Working Papers from The Croatian National Bank, Croatia
Bibliographic data for series maintained by Romana Sinković ().