Terms and conditions for the implementation of Inflation targeting in Croatia

Since the introduction of the Stabilization program in 1993, the Croatian National Bank has been following the monetary strategy of exchange rate anchor. During the first several years (from 1993 to 1997) this monetary strategy achieved acceptable results, accompanied with a low inflation rate and high GDP growth rates. However, the macroeconomic situation has changed in the last decade. The indicators of Croatian economy, such as trade balance, the level of external debt and GDP growth rates, are not satisfying. The criticizers of exchange rate anchor monetary strategy argue that appreciated kuna lowers the competitiveness of the domestic economy. Due to that, the current monetary strategy is in the focus of various economists' discussions. One of the alternatives to the exchange rate anchor is inflation targeting. There are different theoretical and practical issues connected to the implementation of this, very popular, monetary strategy. Before the implementation of inflation targeting, the following conditions need to be fulfilled: (1) the independence of monetary authorities in choosing the monetary instruments should be achieved, (2) at least one monetary policy instrument should be efficient, and (3) the transparency of monetary policy should be accomplished. The process itself consists of several decisions, such as choosing the proper measure of inflation, the level of targeted inflation, targeted range or point etc., which is still a matter of theoretical debates. The purpose of this paper is to contribute to the above mentioned debate. After the theoretical discussion, the inflation targeting will be analyzed from the two perspectives. Firstly, in order to evaluate the capability of Croatia to implement the inflation targeting, the analysis of the Croatian monetary system will be given. Secondly, in order to asses the suitability of the inflation targeting as Croatian monetary strategy, both positive and negative characteristics of this strategy will be considered.