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Granger causality and innovation accounting analysis of the monetary transmission mechanism in Croatia

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  • Djula Borozan

Abstract

This article explores the pass-through of different monetary policy channels to inflation in Croatia between January 1998 and December 2009. Using a four-step procedure: unit root test, co-integration test, Granger causality and innovation accounting techniques, we find that ( i ) interest rates, credits and the nominal exchange rate do not Granger-cause inflation individually; however, they do with nominal M1 money supply jointly at lag two; ( ii ) the nominal effective exchange rate is the most important pass-through to inflation statistically, accounting for approximately 11% of forecast error variance after four years; ( iii ) credits and nominal M1 have very small portions in explaining variations in the total variance of inflation; and ( iv ) the nominal interest rate is the weakest but statistically significant channel to inflation in the long run. These results are discussed within the Croatian monetary framework and future developments of monetary channels in Central and Eastern European countries.

Suggested Citation

  • Djula Borozan, 2011. "Granger causality and innovation accounting analysis of the monetary transmission mechanism in Croatia," Post-Communist Economies, Taylor & Francis Journals, vol. 23(4), pages 517-537, May.
    • Handle: RePEc:taf:pocoec:v:23:y:2011:i:4:p:517-537
    DOI: 10.1080/14631377.2011.622575
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    References listed on IDEAS

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