Keywords

VAR model with block-exogenous restrictions, small open economy, inflation, GDP, external shocks

This paper explores the spillover effects of external shocks on inflation and gross domestic product in Croatia. Impulse responses and variance decomposition of the estimated VAR model with block-exogenous restrictions point to external factors as the main determinants of domestic inflation and domestic economic activity. On the other hand, domestic shocks only slightly influence the movements and fluctuations of domestic variables. The VAR model estimation results show that the relevance of external shocks must be taken into account in theoretical modelling of domestic economic activity and prices.