•We study the readiness of Bulgaria, Croatia and Romania to adopt the common monetary policy of the ECB.•Our results show that the importance of ECB-relevant shocks in these countries is fairly ...pronounced.•In this context we can say that these countries are ready to adopt the common monetary policy.•Our results also show that here are some differences between the peggers (Bulgaria and Croatia) and the floater (Romania).
In this paper, we study the readiness of Bulgaria, Croatia and Romania to adopt the common monetary policy of the ECB in the context of the third round of euro area enlargement. Following the optimal currency area (OCA) theory literature, we focus on the coherence of economic shocks between candidate countries on the one hand and the euro area on the other and analyse the relevance of euro area shocks for key macroeconomic variables in these countries. Our results, based on a novel empirical approach, show that the overall importance of those shocks that are relevant for the ECB is fairly similar in candidate countries and the euro area. The cost of joining the euro area should, therefore, not be pronounced, at least from the aspect of the adoption of the common counter-cyclical monetary policy. This conclusion holds for all three candidates, despite important differences in their monetary and exchange rate regimes.
Twenty years after the introduction of the euro, some European countries are still not willing to join the monetary union. Sweden, Czechia, Hungary, and Poland, although obliged to introduce the ...euro, decided to postpone this process indefinitely. There are various economic, political, legal, sociological, and even emotional factors underlying such a decision. In this paper, we focus on the key economic argument against euro adoption in these countries—the cost of the loss of monetary policy independence. Our results indicate that there already is a high correlation and synchronicity in key interest rates and business cycles between the euro area and non-euro area European countries. Most importantly, our analysis also suggests that business cycles in both groups of countries are predominately driven by the same (
common
) shocks. Following the postulates of the OCA theory, we therefore provide evidence supporting the view that the common monetary policy in these countries would, most likely, be an adequate substitute for national countercyclical policies.
U ovom radu daju se novi empirijski dokazi relevantni za rasprave o neovisnosti monetarne politike u kontekstu uvoðenja eura u tri zemlje Srednje i Istočne Europe (CEE): Češkoj, Maðarskoj i Poljskoj. ...Za razliku od mnogih drugih autora, u ovom se radu težište stavlja na realne, a ne na nominalne kamatne stope, jer su realne kamatne stope u središtu moderne makroekonomske teorije i monetarne politike. U istraživanju se primjenjuje nekoliko metodologija za ispitivanje konvergencije realnih kamatnih stopa izmeðu ovih zemalja i euro-područja kako bi se utvrdili glavne odrednice realnih kamatnih stopa. Na temelju testova jediničnog korijena nalazimo dokaze o konvergenciji realnih kamatnih stopa u tim zemljama, čime se potvrðuje hipoteza o realnom kamatnom paritetu (RIRP). Nadalje, primijenjena analiza glavnih komponenata (PCA) ukazuje na činjenicu da se zajedničkim faktorom izdvojenim iz uzorka zemalja Srednje i Istočne Europe i pojedinih zemalja euro-područja može objasniti visok udio kretanja realnih kamatnih stopa u tim zemljama. Konačno, rezultati našeg predloženog novog analitičkog okvira za analizu odrednica realnih kamatnih stopa u malim otvorenim gospodarstvima, temeljenog na Bayesovskom VAR modelu s pretpostavkom blok-egzogenosti (eng. block exogeneity ), pokazuju da vanjski šokovi imaju nezanemariv učinak na kretanje realnih kamatnih stopa u odabranim zemljama srednje i istočne Europe. Dakle, naši rezultati pokazuju da realne kamatne stope u SIE ovise o čimbenicima koji su izvan dosega domaćih kreatora monetarne politike. U tom smislu može se zaključiti da je (konvencionalna) neovisnost monetarne politike u tim zemljama ograničena. Stoga gubitak neovisnosti monetarne politike vidimo kao pretjerano naglašeni argument u raspravama o uvoðenju eura u tim zemljama. Meðutim, svjesni smo da su se nacionalne središnje banke u Srednjoj i Istočnoj Europi nedavno počele više oslanjati na nekonvencionalne mjere, što im daje veći stupanj fleksibilnosti (i autonomije).
This paper brings an empirical assessment of economies of scale in local government units in Croatia. Using cross-section OLS models, we found statistically significant U-shaped relationship between ...local per capita expenditures and population size, while controlling for various demographic, socio-economic and institutional factors. The choice of control variables in the paper is based on the existing empirical literature but also includes factors capturing the specificities of Croatian economy and local government institutional setup. Using estimated regression coefficients we calculated the optimal size of local units and showed that population size is below optimal in 72% of cities and 76% of municipalities (based on median results).
The widening fiscal deficits and the increase of public debt triggered by the COV1D-19 crisis suggest thatfiscal policy makers will have to engage in substantial fiscal consolidation in order to ...stabilize public finances in the mid run. However, the implementation of a fiscal consolidation package, if it is not properly designed, can be detrimental for growth and even lead to a self-defeating outcome. In order to avoid this undesirable scenario, fiscal policy makers should rely on growth-friendly consolidation packages. The design of growth-friendly fiscal consolidation packages requires an understanding of the size of multipliers of different fiscal instruments. Thus, in this paper we provide the first deeper insights into the size of model-based disaggregated fiscal multipliers in Croatia. For this purpose, we have built a semi-structural macro-fiscal model of the Croatian economy and used Croatia s experience during the fiscal consolidation episode under the excessive deficit procedure (EDP) to retrieve fiscal multipliers, analyse the design of the policy package and provide model-based evaluation of the macroeconomic effects of this consolidation episode. Our results indicate that the fiscal consolidation implemented during the EDP was not growth-friendly and that it was partially self-defeating. We hope that our results can help fiscal policy makers to avoid similar policy mistakes in future fiscal consolidations.
In this paper we calibrate a small open economy (SOE) New-Keynesian DSGE model for the Croatian economy. The main focus of the paper is on the effects of fiscal policy, more precisely government ...consumption, on employment, output, inflation and trade balance. After we analyse the model impulse responses we confront these results with the empirical results of VAR model. Our results indicate that the presented DSGE model can be a useful starting point and a toolkit in fiscal policy analysis in Croatia as estimated impulse responses from VAR model mostly match impulse responses from the calibrated model. Also, empirical results indicate that fiscal policy has a significant effect on macroeconomic developments in Croatia. Thus, it is a responsibility of fiscal policy makers to prudently use and adjust fiscal instruments in such a way that fiscal policy can always have a counter-cyclical, stabilizing effect on Croatian economy.
In this paper, we use the structural VAR model to analyse the dynamic effects of (discretionary) fiscal shocks on the economic activity of the private sector in Croatia between 2000 and 2012. Due to ...the fact that Croatia is a small open transition economy, we assume that shocks of foreign origin can have notable effects on its performance. Therefore, the original Blanchard-Perotti identification method is extended by introducing variables that represent external (foreign) demand shocks. The results show that government spending has a positive and statistically significant effect on private aggregate demand and private consumption, and that net indirect taxes have a negative and statistically significant effect on private consumption and private investment.
In this paper we calibrate a small open economy (SOE) New-Keynesian DSGE model for the Croatian economy. The main focus of the paper is on the effects of fiscal policy, more precisely government ...consumption, on employment, output, inflation and trade balance. After we analyse the model impulse responses we confront these results with the empirical results of VAR model. Our results indicate that the presented DSGE model can be a useful starting point and a toolkit in fiscal policy analysis in Croatia as estimated impulse responses from VAR model mostly match impulse responses from the calibrated model. Also, empirical results indicate that fiscal policy has a significant effect on macroeconomic developments in Croatia. Thus, it is a responsibility of fiscal policy makers to prudently use and adjust fiscal instruments in such a way that fiscal policy can always have a counter-cyclical, stabilizing effect on Croatian economy.
Following the Romer and Romer narrative approach (RR), this paper investigates the effects of tax changes (personal income tax and value added tax in particular) on economic activity in Croatia. We ...use the narrative approach to identify exogenous tax shocks and construct a unique time series of these shocks for the 2004-2019 period. However, as Croatia is a small open economy, we adjust the original RR modelling approach by taking into account the relevance of external (demand) shocks. Our results indicate that positive tax shocks lead to a fall in private consumption and output in the Keynesian manner. We show that, compared to direct taxes, indirect taxes exercise a stronger effect on macroeconomic aggregates, but the effect of direct taxes is statistically significant throughout the whole time horizon and does not fade out. As the main contributions of this paper to the existing literature, we highlight the following: firstly, this paper sets forth the first estimates of the macroeconomic effects of tax changes based on the narrative approach in the case of a developing economy; secondly, this study extends the original RR approach by including the effects of external shocks, making this approach more suitable for the analysis of fiscal policy in small open economies.
PDF
