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The Analysis of Monetary Transmission Mechanism in Croatia Using Cointegration Approach

In this paper, authors analyze monetary transmission in Croatia from 1998 to 2009 including the impact of euro area income using cointegration approach. Direct channel, interest rate channel and exchange rate channel are discussed. The analysis of interest rate, exchange rate, money supply, income in Croatia as well as euro area income time series is conducted. ADF tests show the stationarity of time series in first differences, thus cointegration approach is used to examine effects of mentioned variables on Croatian income. Cointegrating relations are found among selected variables and income. The innovation analysis, i.e. variance decomposition and impulse response function analysis is done. Cointegration analysis has shown that mentioned monetary transmission channels are significant in the long run, as well as the effect of euro area income on Croatian income. The article concludes by the comparison of monetary transmission in Croatia with empirical findings and theoretical background.

cointegration approach; innovation analysis; monetary transmission; euro area impact

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