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Fiscal Consolidation, External Competitiveness and Monetary Policy: A Reply to the WIIW

Author

Listed:
  • Evan Kraft
  • Tihomir Stručka

Abstract

Recent studies of policy alternatives for Croatia prepared by the WIIW contend that fiscal discipline in Croatia remains weak, and argue for a policy mix of tighter fiscal policy and looser monetary policy aimed at achieving nominal exchange rate depreciation. In this reply, we argue that substantial fiscal adjustment is already taking place and that the goal of sustainable fiscal deficits is achievable in the medium term. In addition, we argue that Croatia’s trade problems have a great deal to do with problems such as exclusion from free trade areas and domestic, bureaucratic barriers to domestic investment and FDI. Attempts to achieve substantial nominal depreciation, if technically viable at all, may not even create real depreciation. They may also have unacceptable consequences for inflation and even the current account deficit, given the apparently low elasticity of Croatian exports and high dependency on imported intermediate goods.

Suggested Citation

  • Evan Kraft & Tihomir Stručka, 2002. "Fiscal Consolidation, External Competitiveness and Monetary Policy: A Reply to the WIIW," Surveys 8, The Croatian National Bank, Croatia.
    • Handle: RePEc:hnb:survey:8
    as

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    File URL: https://www.hnb.hr/documents/20182/121909/s-008.pdf/a5ecb118-087e-4f8b-928c-79c68c993da6?t=1620029116567
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    References listed on IDEAS

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    1. Eichenbaum, Martin & Rebelo, Sérgio & Burstein, Ariel Tomas, 2002. "Why Are Rates of Inflation So Low After large Devaluations," CEPR Discussion Papers 3178, C.E.P.R. Discussion Papers.
    2. Nouriel Roubini & Paul Wachtel, 1997. "Current Account Sustainability in Transition Economies," Working Papers 97-03, New York University, Leonard N. Stern School of Business, Department of Economics.
    3. Buiter, Willem H., 1996. "Aspects of Fiscal Performance in some Transition Economies under Fund-supported Programs," CEPR Discussion Papers 1535, C.E.P.R. Discussion Papers.
    4. Estrin, Saul & Bevan, Alan, 2000. "The Determinants of Foreign Direct Investment in Transition Economies," CEPR Discussion Papers 2638, C.E.P.R. Discussion Papers.
    5. Alan A. Bevan & Saul Estrin, 2000. "The Determinants of Foreign Direct Investment in Transition Economies," William Davidson Institute Working Papers Series 342, William Davidson Institute at the University of Michigan.
    6. Blomstrom, Magnus & Kokko, Ari, 1997. "How foreign investment affects host countries," Policy Research Working Paper Series 1745, The World Bank.
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    Keywords

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    JEL classification:

    • P27 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Performance and Prospects
    • P24 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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