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Financial Cycles and the Real Economy

Financial Cycles and the Real Economy

Lessons for CESEE Countries

Edited by Ewald Nowotny, Doris Ritzberger-Grünwald and Peter Backé

What is the link between the financial cycle - financial booms, followed by busts - and the real economy? What is the direction of this link and how salient is this connection? This unique book examines these fundamental questions and offers a paramount contribution to the debate surrounding the recent financial and economic crisis.

Chapter 7: Credit cycles and central bank policy in Croatia: lessons from the 2000s

Mirna Dumičić and Vedran Šošić

Subjects: economics and finance, financial economics and regulation, money and banking


The literature dealing with macroprudential policy conducted before it became a hot topic among policy-makers, researchers and market participants shows that the Croatian National Bank (CNB) was among the first central banks to introduce measures and instruments aimed at preventing and slowing down systemic risk accumulation while simultaneously increasing the financial system’s resilience to potential shocks (Lim et al., 2011; Lim et al., 2013). Numerous reasons encouraged the CNB to implement an, at the time, rather unorthodox set of measures. These reasons reflected the inherent characteristics of the domestic economy such as size, openness or euroization level, which limited the scope for conventional monetary policy, but they were also associated with global developments like financial liberalization, convergence, high global liquidity and low risk aversion. Given strong foreign capital inflows (see Figure 7.1) and credit expansion, the CNB was timely in recognizing the high potential risks coming from exposures to global markets, as well as from potential internal shocks caused by the processes initiated or supported by large inflows of foreign capital in an environment of relatively low disposable income and a high propensity to consume; its policy was therefore mainly aimed at regulating the inflow of capital into the banking system in such a way that it supports, rather than impedes sustainable economic growth (Rohatinski, 2009a).

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