Monetary Policy in a Highly Euroized Economy

In this chapter the authors trace the evolution of Croatian monetary policy since independence to the present day. Its aim is to systematically describe and explain a plethora of monetary and macroprudential policy instruments and tools the Croatian National Bank (CNB) used from the moment it was founded, throughout its harmonization with the EU legislative framework, and to explain its future prospects and monetary policy goals. The authors empirically examine deposit and credit financial euroization, as well as associated balance sheet vulnerabilities that pose significant exchange rate and currency-induced credit risks. To demonstrate the potential impact of currency mismatches, authors analyze the case of loans indexed to the Swiss franc. The chapter concludes by a simple econometric analysis of the sensitivity of the nominal HRK/EUR exchange rate, short- and long-term interest rates and investment to foreign exchange rate interventions. This demonstrates the effectiveness of the main monetary policy instrument in Croatia—occasional and unannounced foreign exchange intervention.