The Impact of Monetary Environment on Unemployment in the Republic of Croatia

Abstract

The assumption is that expansionary monetary policy is good for reducing unemployment, and vice versa. In this context, the status of monetary policy is defined, which is called monetary conditions. For this, the IFIS Financial Conditions Index published by the Institute of Economics, Zagreb, was used as a synthetic indicator of the state of numerous monetary variables (27 variables). By analysing the movements of restrictive and expansionary monetary conditions presented by the IFIS index and the unemployment rate conducted in this paper, it can be concluded that there is a strong link between the index of macroeconomic monetary conditions and unemployment in Croatia. This relationship operates with a time lag of one year, i.e., a change in monetary conditions leads to a change in the overall unemployment rate after one year. Although there is a link between monetary conditions and youth unemployment, it is weaker because youth unemployment is significantly influenced by other factors. These are primarily emigration after Croatia’s accession to the European Union and liberalization of the labour market.