Inflationary dynamics of a transition economy: the Croatian experience

This paper undertakes an exploratory analysis of the inflationary dynamics within the Croatian economy over the period January 1992-December 1999. Recognizing the structural break in the inflationary process corresponding to the anti-inflationary stabilization program of October 1993, the analysis proceeds by estimating an augmented vector antoregressive (VAR) model of the log first-differences for the broad money supply, retail price index (RPI), nominal net wage per employee, and the nominal effective exchange rate (NEX) along with evaluating generalized forecast error variance decompositions to infer the empirical relationship among the four variables. The results show that inflation is positively related to wage growth and currency depreciation. Interestingly enough, lagged values of inflation are insignificant suggesting the absence of inflation inertia. Moreover, there appears to be feedback from wage growth, currency depreciation along with past money growth to current money growth. Wage growth is influenced by past wage growth and currency depreciation. Finally, currency depreciation is affected by money growth and past currency depreciations. (C) 2002 Society for Policy Modeling. Published by Elsevier Science Inc. All rights reserved.