A Brand New CROLEI: Do We Need a New Forecasting Index?

The aim of this paper is to determine whether the existing leading indicators system CROLEI (CROatian Leading Economic Indicators) and its derivative, the CROLEI forecasting index, predict overall Croatian economic activity reliably. The need to evaluate the CROLEI system and the index stems from the modification of the barometric method on which the system and the index are founded on in its application in Croatia. The evaluation of the forecasting power involved the construction of six alternative forecasting indices, which not only challenge the original CROLEI index, but also enable comparisons of forecasting power. The construction of the alternative forecasting indices is also based on the barometric method. The authors then proceed to adjust more complex measurements i.e. forecasting power evaluation matrix, in order to obtain credible forecasting power estimates. Forecasting power is also estimated using two regression models that allow for the forecasting of reference series and yield measurements of forecasting power. The results of both approaches indicate not only that the original CROLEI has by far the greatest forecasting power, but also that it is able to predict the turning points in the economic cycle with the highest probability.CROLEI (CROatian Leading Economic Indicators), forecasting indicator,barometric method, signaling method

Econometric Analysis of Monetary Transmission Channels in Croatia

Cilj ovog rada je istražiti bitne osobine i način funkcioniranja mehanizma monetarnog prijenosa u Republici Hrvatskoj. Da bi se empirijskim putem procijenio utjecaj provođenja monetarne politike na realni sektor u Hrvatskoj, izvršena je analiza vremenskih serija koja uključuje test jediničnih korijena, vektorsku autoregresiju, kointegraciju Johansenovom metodom, Grangerov test uzročnosti te model korekcije odstupanja. Dobiveni rezultati ukazuju na činjenicu da je monetarna politika Republike Hrvatske u tranzicijskom razdoblju značajno utjecala na realni sektor regulacijom novčane mase i deviznog tečaja. Oni također potvrđuju da monetarna politika u Republici Hrvatskoj ne utječe na realnu ekonomsku aktivnost kroz kanal kamatne stope. Budući da se u Europskoj uniji monetarni prijenos na realni sektor uglavnom odvija putem kamatnih stopa, pokazana bi kratkoročna neelastičnost gospodarstva na promjene kamatnih stopa mogla predstavljati problem prilikom ulaska Hrvatske u Europsku monetarnu uniju. Hrvatska bi ekonomija mogla ili ne reagirati na europske kamatne stope ili bi monetarni prijenos kanalom kamatne stope mogao biti nesimetričan. Međutim, jednom kad se Hrvatska pridruži EMU-u, visoka bi eurizacija hrvatskog gospodarstva mogla pomoći uspostavljanju kamatnog kanala.The aim of this paper is to explore the characteristics and functioning of monetary transmission in Croatia. Time series analysis (unit root test, VAR, Johansen cointegration procedure, Granger causality tests and error correction model) is used to estimate the influence of exchange rate, interest rate and narrow money on real economic activity. The results of econometric analysis suggest that monetary policy in Croatia had a significant influence on real activity through a direct monetary transmission and exchange rate channel. Furthermore, the results of statistical tests suggest that interest rate channel is not active. Short-term interest rate inelasticity of the Croatian economy combined with a strong exchange rate channel could present a great difficulty once Croatia joins the EMU, since the interest rate channel is the most important channel of monetary transmission in the EU, while the exchange rate channel will be eliminated upon adopting the Euro. This could provoke non- esponsiveness of the Croatian economy to the EU monetary policy or it could make the monetary transmission asymmetric. However, high euroization of the Croatian economy could facilitate the interest rate transmission once the Euro is adopted

Are House Prices Characterized by Threshold Effects? Evidence from Developed and Post-Transition Countries

The authors use a nonlinear framework in order to explore house price determinants and adjustment properties. They test for threshold cointegration using a sample of four developed countries (the United States, the United Kingdom, Spain, and Ireland) and four transition countries (Bulgaria, Croatia, the Czech Republic, and Estonia). In addition to testing for nonlinearities, they explore house price determinants in these four transition countries of Central and Eastern Europe. Asymmetric house price adjustment is present in all transition countries and the USA, while no threshold effects are detected in developed European countries. In a threshold error correction framework, house prices are aligned with fundamentals, but house price persistence coupled with a slow and asymmetric house price adjustment process might have facilitated the house price boom in transition countries and the USA.house prices, threshold cointegration, transition

The Determinants of Financial Euroization in a Post-Transition Country: Do Threshold Effects Matter?

This paper investigates the long-run and short-run determinants of financial euroization (FE) using both linear and threshold models. We model deposit euroization (DE) and credit euroization (CE) in Croatia, a post-transition country recording very high and persistent unofficial FE. The results suggest that only the portfolio view is important for explaining DE and CE. The market failure view does not seem to matter for FE in Croatia. Both nominal and real exchange rate changes have a strong effect on FE in the long run; the former is more important for DE and the latter for CE. In the short and long run CE is also determined by matching behavior of banks’ foreign currency positions. Both DE and CE respond to changes in inflation and exchange rate volatility. Threshold cointegration confirms that FE determination is subject to significant threshold effects, while error correction models suggest that FE adjustment is very slow and asymmetric, partly due to very strong FE persistence.financial euroization, transition, cointegration, threshold

Econometric Analysis of Monetary Transmission Channels in Croatia

The aim of this paper is to explore the characteristics and functioning of monetary transmission in Croatia. Time series analysis (unit root test, VAR, Johansen cointegration procedure, Granger causality tests and error correction model) is used to estimate the influence of exchange rate, interest rate and narrow money on the real economic activity. The results of econometric analysis suggest that monetary policy in Croatia had a significant influence on the real activity through the direct monetary transmission and exchange rate channel. Furthermore, the results of statistical tests suggest that the interest rate channel is not active. The short-run interest rate inelasticity of Croatian economy combined with a strong exchange rate channel could present a great difficulty once Croatia joins the EMU, since the interest rate channel is the most important channel of monetary transmission in the EU, while the exchange rate channel will be eliminated upon adopting the euro. This could provoke a non-responsiveness of the Croatian economy to the EU monetary policy or it could make the monetary transmission asymmetric. However, high euroisation of the Croatian economy could facilitate the interest rate transmission once the euro is adopted

THE SOVEREIGN BOND MARKETS RETURN AND VOLATILITY SPILLOVERS

The aim of this paper is to apply the spillover index methodology developed by Diebold and Yilmaz (2009, 2012) to investigate the role individual sovereign bond markets play in international sovereign bond market volatility spillovers. Daily data for 19 developed and developing countries from four continents is used in order to estimate fixed and time-varying return and volatility spillovers index for sovereign bond markets during post-Lehman Brothers bankruptcy period. In addition, we decompose the overall sovereign bond markets return and volatility spillover index into specific country-to-country spillovers to detect individual countries that explain the majority of detected spillovers. We find that innovations to the US sovereign bond market have the biggest influence on the return and volatility variance in other sovereign bond markets across the globe. In addition, spillovers are more intensive for the sovereign bond returns than for volatilities in the observed period. European debt crisis seem to be the cause of surges in return and volatility spillover in the observed period