On the vulnerability of the croatian economy

The paper is based on the analysis of a macroeconometric model mapping the Croatian economy.  The model consists of a comprehensive set of both behavioral equations and identities, and combines Keynesian and neoclassical features. The Keynesian elements of the model determine the short-run development assuming that the economy is demand driven and persistent disequilibria in the market for goods and services and especially on the labor market are possible. The modeled supply side of Croatia’s economy is built on neoclassical foundations. Multiple regressions are used to assess how crucial macroeconomic variables like personal consumption, investment spending, interest rates, real effective exchange rates, government consumption, or the fiscal deficit and foreign demand affect among others Croatia’s aggregate output, its rate of unemployment and its price level (with the econometric fitting procedure being based on quarterly data from 1999q1 to 2012q2).

By carrying out multiple simulations we test for the “vulnerability” of Croatia’s economic performance with respect to fluctuations in the volume of world trade, the level of the oil price, and the short-term interest rate within the Euro area.  This analysis helps to explain past effects and, thereby, to achieve important insights about the relative stability of the Croatian economy keeping in mind that Croatia’s EU accession is scheduled for 1 July 2013 (and may eventually lead to joining Euroland), and that in 2009 a small sized country like the neighboring Slovenia was severely damaged by the loss of foreign demand (leading to an economic growth of -9.4%).