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Monetary Policy in a Highly Euroized Economy

Part of the New Perspectives on South-East Europe book series (NPSE)


In this chapter the authors trace the evolution of Croatian monetary policy since independence to the present day. Its aim is to systematically describe and explain a plethora of monetary and macroprudential policy instruments and tools the Croatian National Bank (CNB) used from the moment it was founded, throughout its harmonization with the EU legislative framework, and to explain its future prospects and monetary policy goals. The authors empirically examine deposit and credit financial euroization, as well as associated balance sheet vulnerabilities that pose significant exchange rate and currency-induced credit risks. To demonstrate the potential impact of currency mismatches, authors analyze the case of loans indexed to the Swiss franc. The chapter concludes by a simple econometric analysis of the sensitivity of the nominal HRK/EUR exchange rate, short- and long-term interest rates and investment to foreign exchange rate interventions. This demonstrates the effectiveness of the main monetary policy instrument in Croatia—occasional and unannounced foreign exchange intervention.


  • Monetary Policy
  • Croatian National Bank (CNB)
  • FX Interventions
  • Current Mismatch
  • Macroprudential Policy

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  1. 1.

    Serbian commercial banks significantly increased their placements in order to cover current expenditures that had been financed by retrieving reserves deposited at the NBJ. Other banks soon followed suit. After independence, Croatia took over the obligation to repay foreign currency deposits to savers, lost through the NBJ’s maneuver.

  2. 2.

    At the beginning of 2017, HRK-denominated monetary aggregate M1 was totaling more than 11 billion EUR, while CNB’s FX reserves amounted to almost 16 billion EUR, implying coverage of more than 100%.

  3. 3.

    Croatian kuna (HRK) was introduced as an official currency in May 1994.

  4. 4.

    Legislation on central bank independence (CBI) was coded on 16 dimensions related to four components of CBI (appointment, policy formulation, etc.) and combined into a single weighted index.

  5. 5.

    In the 1994–2007 period Croatia received one of the largest gross capital inflows as a percentage of GDP among transition countries, despite the strategy of gradual capital account liberalization (Ötker-Robe et al. 2007).

  6. 6.

    As of 2015 (the latest data available), Croatia kept the same level of restrictiveness as Poland and Slovenia, while other CEE economies preferred a more liberalized approach.

  7. 7.

    CNB might have used loan-to-value and loan-to-income ratios to prevent households from taking too much debt but it regrettably abstained from it. However, this would not solve the issue of corporates borrowing abroad.

  8. 8.

    The only significant interest group actively lobbying for HRK depreciation is the Association of Croatian Exporters.

  9. 9.

    Among eight offered barriers to doing business, entrepreneurs identified financing as the fourth biggest barrier while exchange rate came as the least important. Of the sample (460 enterprises), 86% consisted of exporters (HGK 2016).

  10. 10.

    Croatia’s external debt amounted to 91.4% of GDP in 2016. Other non-euro area economies such as Poland and the Czech Republic had significantly lower external debt and the advantage of very low levels of deposit and credit euroization. Besides, Croatia’s ratio of 182.8% between external debt to total exports was the highest among postsocialist economies. Unlike Poland and the Czech Republic, which could use the lever of sharp discount rate reduction to protect their economies against headwinds emanating from the GFC, the CNB has been more limited in cutting rates. Finally, CNB’s role as of a lender-of-last resort (LORL) is restricted by the existing levels of FX reserves, since the bulk of commercial banks’ liabilities are denominated in euro.


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Kotarski, K., Tkalec, M. (2019). Monetary Policy in a Highly Euroized Economy. In: Petak, Z., Kotarski, K. (eds) Policy-Making at the European Periphery. New Perspectives on South-East Europe. Palgrave Macmillan, Cham.

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