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The Empirical Evaluation of Monetary Policy Rules in the Small Open Economy DSGE Model: Evidence from Croatia

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  • Irena Palić

    (Faculty of Economics and Buisness in Zagreb, University of Zagreb)

Abstract

The aim of this article is to empirically evaluate the compliance of four different monetary policy rules in the DSGE model with empirical characteristics of a small open economy. The small open economy is represented by Croatia, while the large foreign sector is represented by the euro area without Croatia. The new Keynesian small open economy DSGE model with four monetary policy rules is calibrated. Since the essential characteristic of a small open economy is the exogeneity of foreign variables, to empirically test the effects of shocks in a small open economy, the structural vector autoregression (SVAR) model with block exogenous restrictions is estimated and euro area variables are treated as exogenous. The impulse response functions analysis points to the conclusion that fixed exchange rate suits the best to the empirical impacts of analysed shocks in Croatia. The results of the research are important in the context of recent accession of Croatia to the euro area and the monetary policy design in small open economies.

Suggested Citation

  • Irena Palić, 2025. "The Empirical Evaluation of Monetary Policy Rules in the Small Open Economy DSGE Model: Evidence from Croatia," Ekonomski pregled, Hrvatsko društvo ekonomista (Croatian Society of Economists), vol. 76(1), pages 49-70.
    • Handle: RePEc:hde:epregl:v:76:y:2025:i:1:p:49-70
    DOI: 10.32910/ep.76.1.4
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    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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