Abstract
At the beginning of the 30-year transitional period, spanning from 1990 to 2020, Croatia was battling high inflation. After successfully taming hyperinflation, Croatia addressed another challenge – the high capital inflows in the early 2000s – and implemented countercyclical macroprudential measures. When the financial crisis hit, the Croatian National Bank (CNB) responded by releasing liquidity and relaxing its monetary stance to preserve the country’s external liquidity in an environment characterized by a ‘sudden stop’ in capital flows. The current challenges for the CNB are joining the Exchange Rate Mechanism and adopting the euro for which Croatia is well prepared due to sound macroeconomic fundamentals and a significant level of real and nominal convergence. The costs of euro adoption are one-off and limited costs, while the benefits of euro adoption are long lasting and significant. Croatian business cycles are highly synchronized with the euro area and the monetary policy of the European Central Bank (ECB) will be appropriate for the Croatian economy. Macroprudential tools that have proven to be efficient in curbing macroprudential risks remain largely within the national domains.
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