Monetary and absorption approach to explain the Croatian current account

Abstract

The paper brings the determinants of Croatian current account dynamics under monetary and absorption approach. The main hypothesis of the paper assumes that Croatian current account can be explained within the framework based on the monetary and absorption approach to balance of payments. The research employed newly developed Non-linear Auto-Regression Distributed Lag (NARDL) approach that takes into account nonlinear and asymmetric nature of the relationship between Croatian current account and its determinants. Estimated results on a quarterly data sample from the first quarter of 2000 to the second quarter of 2017 supports the main research hypothesis and reveals that that Croatian current account can be explained using the analytical framework based on the monetary and absorption approach. Domestic demand, real exchange rate index, loans to private sector and monetary aggregates M4 are tested as the determinants of Croatian current account. Monetary aggregates M4 are found to hold the highest explanatory power among tested monetary variables. The main findings of the paper suggest the need for fiscal policy measures and relaxing the liquidity constraints for the Croatian exporters as necessary to obtain external equilibrium.

Keywords

• asymmetric cointegration
• current account
• monetary approach
• absorption approach
• Croatia