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Floating With A Large Life Jacket: Monetary And Exchange Rate Policies In Croatia Under Dollarization

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  • VEDRAN ŠOŠIĆ
  • EVAN KRAFT

Abstract

Even after more than a decade of low inflation, Croatia remains highly dollarized. Commercial banks avoid currency mismatch by indexing loans to the exchange rate. Although this eliminates direct currency risk, it creates credit risk, because any larger depreciation might induce borrower defaults. Monetary and exchange rate policies focus on exchange rate smoothing to safeguard financial stability. Dollarization has prevented the use of monetary policy to stabilize output. Given Croatia's likely entry into the EU and adoption of the Euro, dedollarization seems unfeasible. Rather than attempting to reverse dollarization, the central bank has taken measures to make the banking system more robust to shocks. (JEL E52, E58, F31, G21, P24)

Suggested Citation

  • Vedran Šošić & Evan Kraft, 2006. "Floating With A Large Life Jacket: Monetary And Exchange Rate Policies In Croatia Under Dollarization," Contemporary Economic Policy, Western Economic Association International, vol. 24(4), pages 492-506, October.
    • Handle: RePEc:bla:coecpo:v:24:y:2006:i:4:p:492-506
    DOI: 10.1093/cep/byj033
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    References listed on IDEAS

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    Cited by:

    1. Srdjan Marinkovic & Marko Malovic, 2012. "Serbian Credit Market After the Turmoil," Book Chapters, in: João Sousa Andrade & Marta C. N. Simões & Ivan Stosic & Dejan Eric & Hasan Hanic (ed.), Managing Structural Changes - Trends and Requirements, edition 1, volume 1, chapter 14, pages 278-302, Institute of Economic Sciences.
    2. Tomislav Galac, 2012. "Global Crisis and Credit Euroisation in Croatia," Working Papers 33, The Croatian National Bank, Croatia.
    3. Manuel BENAZIC & Ines KERSAN-SKABIC, 2016. "The determinants of exchange rate in Croatia," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 7, pages 125-150, June.

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    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • P24 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation

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