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What is Driving Inflation and GDP in a Small European Economy: The Case of Croatia

Goran Jovičić () and Davor Kunovac ()
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Goran Jovičić: The Croatian National Bank, Croatia
Davor Kunovac: The Croatian National Bank, Croatia

No 49, Working Papers from The Croatian National Bank, Croatia

Abstract: In this paper we estimate and identify a small open economy Bayesian VAR model in order to disentangle the contribution of individual domestic, euro area-specific and global shocks to domestic macroeconomic developments. Our identification suggests that foreign (global and euro area - specific) shocks have a large impact on the variability of domestic variables - they account for approximately 40% of variation in GDP growth and around 50% of variation in inflation. Looking at the contribution of individual structural shocks our results emphasize two particular findings. First, low oil prices have played an important role for muted inflation in Croatia during the last two years while, at the same time, domestic real activity has not benefited much. We show how this finding depends crucially on the specific mix of economic shocks underlying the movements in oil prices (demand vs supply shocks). Second, our results suggest that the large-scale asset purchase programme launched by the ECB at the beginning of 2015 resulted in favourable, albeit limited, spillover effects on domestic economy.

Keywords: Small open economy; BVAR with sign and zero restrictions; Oil prices; ECB monetary policy (search for similar items in EconPapers)
JEL-codes: E10 E30 E50 Q43 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2017-04
New Economics Papers: this item is included in nep-eec, nep-mac, nep-mon and nep-tra
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Citations: View citations in EconPapers (9)

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