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Structure of capital flows and exchange rate: the case of Croatia

Author

Listed:
  • Maja Bukovšak

    (Croatian National Bank)

  • Gorana Lukinić Čardić

    (Croatian National Bank)

  • Nina Pavić

    (Croatian National Bank)

Abstract

The paper analyses the impact of different types of capital flows on the exchange rate in a small open economy using Croatian data. We estimate structural vector autoregressive models based on Cholesky decomposition with block exogeneity restrictions using different types of capital flows and find that the structure of capital flows matters for their impact on the exchange rate. On the one hand, debt capital inflows lead to kuna appreciation, irrespective of their maturity, while in terms of sectoral structure this is mostly due to corporate and government borrowing. On the other hand, there is some evidence that equity capital inflows lead to kuna depreciation, which could stem from their stronger orientation towards the tradable sector. The results also indicate that capital flows to the banking sector have no effect on the exchange rate, providing support for the use of countercyclical measures by the central bank.

Suggested Citation

  • Maja Bukovšak & Gorana Lukinić Čardić & Nina Pavić, 2020. "Structure of capital flows and exchange rate: the case of Croatia," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 47(1), pages 113-146, February.
    • Handle: RePEc:kap:empiri:v:47:y:2020:i:1:d:10.1007_s10663-018-9406-x
    DOI: 10.1007/s10663-018-9406-x
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    More about this item

    Keywords

    Capital inflows; Exchange rate; SVAR with block exogeneity;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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