Abstract
This paper examines the relationship between the Croatian stock market index and relevant macroeconomic variables. Applying the GARCH model, this paper finds that the Croatian stock market index is positively associated with real GDP, the M1/GDP ratio, the German stock market index and the euro area government bond yield and is negatively influenced by the ratio of the government deficit to GDP, the domestic real interest rate, the HRK/USD exchange rate, and the expected inflation rate. Hence, to promote a healthy stock market, the authorities are expected to pursue economic growth, fiscal discipline, moderate increase in the money supply, the appreciation of the kuna, and a relatively low interest rate or expected inflation rate.
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