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Restoring International Competitiveness In Croatia: The Role Of Fiscal And Monetary Policy

Author

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  • Tomislav Ćorić
  • Hrvoje Šimović
  • Milan Deskar-Škrbić

Abstract

Croatia has joined the European Union as a country with several substantial structural problems, of which the most important is weak competitiveness. Although competitiveness can be viewed from the ‘institutional’ perspective, which includes World Development Indicators (WDI) and Doing Business reports, in this paper the authors focus on the more standard view of competitiveness based on unit labour costs (ULC) and real effective exchange rate (REER). As a small, open and highly dollarized/euroised economy that has to coordinate its economic policy with the EU policy framework, Croatia has limited space for increasing international competitiveness using monetary policy measures aimed at (nominal) devaluation of the national currency. Therefore economic policy stakeholders should focus on decreasing unit labour costs and real effective exchange rate mainly through the process of internal devaluation, which is based on adequate fiscal policy measures. In this paper the authors analyse the role of monetary and fiscal policy in the deteriorating real effective exchange rate and unit labour costs since 2000, and their current capabilities and restrictions in restoring international competitiveness. The Structural VAR model (SVAR) is used to estimate the effects of foreign (banking) capital, credit growth, and current public expenditure on REER and ULC. The preliminary hypothesis of the paper is that monetary policy should continue to support bank lending activities and the role of fiscal policy is to achieve an internal devaluation, which will increase the competitiveness of the Croatian economy. Restoring international competitiveness is necessary due to its impact on net exports and consequently the economic recovery of the national economy, which has faced recession conditions for five years in a row. Also, restoring competitiveness is one of the most important preconditions for the success of a small country joining the single European market.

Suggested Citation

  • Tomislav Ćorić & Hrvoje Šimović & Milan Deskar-Škrbić, 2013. "Restoring International Competitiveness In Croatia: The Role Of Fiscal And Monetary Policy," Economic Annals, Faculty of Economics and Business, University of Belgrade, vol. 58(199), pages 39-56, October -.
    • Handle: RePEc:beo:journl:v:58:y:2013:i:199:p:39-56
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    References listed on IDEAS

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    1. Miss Catriona Purfield & Mr. Christoph B. Rosenberg, 2010. "Adjustment Under a Currency Peg: Estonia, Latvia and Lithuania During the Global Financial Crisis 2008-09," IMF Working Papers 2010/213, International Monetary Fund.
    2. Ivo Krznar & Davor Kunovac, 2010. "Impact of External Shocks on Domestic Inflation and GDP," Working Papers 26, The Croatian National Bank, Croatia.
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    Cited by:

    1. Jović Dragan & Jakupović Sanel & Čanković Vanja Šušnjar, 2018. "Index of Monetary Conditions in Bosnia and Herzegovina," Economic Themes, Sciendo, vol. 56(2), pages 161-178, June.
    2. Fruzsina Siger, 2018. "Four years in the club - from external to internal Europeanization in Croatia," IWE Working Papers 239, Institute for World Economics - Centre for Economic and Regional Studies.

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    More about this item

    Keywords

    ECONOMIC POLICY; CAPITAL FLOWS; COMPETITIVENESS; SVAR; CROATIA;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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