More than just supply and demand: Macroeconomic shock decomposition in Croatia during and after the transition period

Abstract

This paper separates macroeconomic shocks into external and domestic aggregate demand and supply shocks in Croatia during and after the transition period using a Bayesian SVAR model. The standard decomposition into aggregate demand and supply shocks covers important information on external sources of economic fluctuations. We find that domestic shocks were a dominant source of fluctuations during the transition period from 1992 to 2000. External shocks increased their importance after 2000, becoming the dominant source of fluctuations with the Global financial crisis. International comparison with other EU post-transition countries shows that short run GDP fluctuations are best explained by domestic aggregate supply shocks in 9 out of 11 analyzed countries, including Croatia. However, in the medium run, GDP fluctuations are dominantly explained by external aggregate demand shocks in 8 out of 11 countries, including Croatia. Inflation in Croatia is driven by external shocks both in the short- and medium run.