From Pandemics to the Unconventional: Monetary Policy in EMs: The Case of Croatia

The emergence of the pandemic has once again highlighted the possibilities of unconventional monetary policy and enabled the expansion of monetary policy instruments in emerging and developing economies. For most of these European countries, the interest rate channel of monetary policy may not be very strong; they are used to balance sheet policies. The balance sheet of the Croatian National Bank (CNB) has also increased in lockstep with the balance sheet of the European Central Bank over the past decade, as have the excess reserves of the banking system. Although the fuel for these increases has been the accumulation of international reserves rather than the purchase of domestic securities, the banking liquidity channel has operated in the same manner. Since the COVID -19 crisis, the CNB has acted within the framework of various measures taken by the government as well as other regulatory institutions. At the same time, the CNB intervened heavily in the foreign exchange market and used a number of monetary policy operations to support kuna liquidity. In addition to standard structural and regular operations and the reduction of the reserve requirements, the CNB initiated for the first time a program to purchase government securities through the secondary market. The CNB used all conventional and unconventional instruments available to central banks in emerging markets, adapted them to specific domestic circumstances and successfully fulfilled its mandate.