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Sign restriction approach to macro stress-testing of the Croatian banking system

Author

Listed:
  • Natasa Erjavec

    (University of Zagreb, Faculty of Economics and Business, Zagreb, Croatia)

  • Boris Cota

    (University of Zagreb, Faculty of Economics and Business, Zagreb, Croatia)

  • Sasa Jaksic

    (University of Zagreb, Faculty of Economics and Business, Zagreb, Croatia)

Abstract

The paper employs Uhlig’s sign restriction approach to stress-testing of the Croatian banking system. The analysis is based on a standard monetary VAR comprising real economic activity, inflation and short-term interest rates augmented by the ratio of non-performing loans or return on average equity, both measures representing the aggregate banking sector. In spite of the selected indicator, the results suggest a strong sensitivity of the Croatian banking sector to macroeconomic shocks. The effects are the strongest for contractionary monetary policy shocks, followed by negative demand shocks while the effects of supply shocks turned out to be statistically insignificant. Since Croatia is a small open economy with banking the dominant financial sector, the results obtained could be interesting for policy makers in Croatia and other transition economies with similar characteristics.

Suggested Citation

  • Natasa Erjavec & Boris Cota & Sasa Jaksic, 2012. "Sign restriction approach to macro stress-testing of the Croatian banking system," Financial Theory and Practice, Institute of Public Finance, vol. 36(4), pages 395-412.
    • Handle: RePEc:ipf:finteo:v:36:y:2012:i:4:p:395-412
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    References listed on IDEAS

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    1. K. Farrant & G. Peersman, 2005. "Is the exchange rate a shock absorber or a source of shocks? New empirical evidence," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/285, Ghent University, Faculty of Economics and Business Administration.
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    10. Farrant, Katie & Peersman, Gert, 2006. "Is the Exchange Rate a Shock Absorber or a Source of Shocks? New Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 939-961, June.
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    Cited by:

    1. Olayinka Akinlo & Mofoluwaso Emmanuel, 2014. "Determinants Of Non-Performing Loans In Nigeria," Accounting & Taxation, The Institute for Business and Finance Research, vol. 6(2), pages 21-28.
    2. Petr Jakubík & Thomas Reininger, 2013. "Determinants of Nonperforming Loans in Central, Eastern and Southeastern Europe," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 48-66.
    3. Mustafa Tevfik Kartal & Derviş Kirikkaleli & Fatih Ayhan, 2023. "Nexus between non‐performing loans and economic growth in emerging countries: Evidence from Turkey with wavelet coherence approach," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1250-1260, April.

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