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The Impact of Financial Integration on Sectoral Polarization between Croatia and Eurozone Countries

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Abstract

The purpose of this paper is to analyse the impact of financial integration, as measured by bilateral FDI, on sectoral structures in Croatia and eurozone countries. The research objective is to determine whether there is a “bad” specialisation, i.e., a separation of sectoral structures that increases the costs of monetary integration of Croatia. The “bad” specialisation is the result of the inefficient allocation of productive resources to sectors with lower productivity. The research results show that financial integration promotes Croatia’s specialisation and makes the country more vulnerable to the occurrence of idiosyncratic shocks, which increases the costs of Croatia’s monetary integration. Moreover, the process of structural divergence shifts the specialisation of the Croatian economy to non-tradable sectors, making real convergence with more developed euro area countries more difficult. The impact of financial integration on the sectoral structures of Croatia and eurozone countries in the period 2001–2019 is analysed using a panel model. The panel results show that the impact is stronger if we exclude the crisis years. This suggests a stronger polarisation of sectoral structures between Croatia and eurozone countries during periods of larger FDI inflows to Croatia.

Keywords

  • Financial integration
  • Monetary integration
  • “Bad” specialisation
  • Croatia
  • Eurozone
  • Sectoral structures

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  • DOI: 10.1007/978-3-030-99850-9_4
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Fig. 1
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Notes

  1. 1.

    If there are mechanisms that perfectly absorb idiosyncratic shocks, sectoral specialisation does not necessarily lead to divergence of business cycles, i.e., it makes it more difficult to implement a common monetary policy. However, previous research shows that there are price and wage rigidities (Kunovac and Pufnik 2015) and constraints in the implementation of fiscal policy in Croatia (Šimović et al. 2014). Research for euro area countries confirms that risk-sharing channels are not strong enough to fully absorb idiosyncratic shocks (Cimadomo et al. 2018; Furceri and Zdzienicka 2015; Afonso and Furceri 2008; Asdrubali et al. 1996), and such measures should not be neglected. Specialisation which increases the risk of idiosyncratic shocks and thus the costs of monetary integration.

  2. 2.

    For example, if a country faces a decline in national savings due to an increase in the government deficit, it may be easier to draw on foreign savings to maintain the level of national investment.

  3. 3.

    Author’s calculation according to Eurostat data (average from 2001 to 2019)

  4. 4.

    The division into tradable and non-tradable sectors was modeled on Gelo and Družić (2015).

  5. 5.

    Although comprehensive trade flows should include services, data on bilateral trade in services between Croatia and the eurozone countries are not available. Accordingly, services are not included in the calculation of the degree of trade integration.

  6. 6.

    Croatia with every eurozone country.

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Correspondence to Mario Pečarić .

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Pečarić, M., Tolj, A., Blažić, H. (2022). The Impact of Financial Integration on Sectoral Polarization between Croatia and Eurozone Countries. In: Olgić Draženović, B., Buterin, V., Suljić Nikolaj, S. (eds) Real and Financial Sectors in Post-Pandemic Central and Eastern Europe. Contributions to Economics. Springer, Cham. https://doi.org/10.1007/978-3-030-99850-9_4

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