Can the Adoption of the Euro in Croatia Reduce the Cost of Borrowing?

Published: 27/11/2017
Publication Surveys
Issue S-28
Authors Davor Kunovac and Nina Pavić
Date November 2017
JEL E42, F45
ISSN 1334-014X


euro, borrowing costs, CDS premium, credit rating, Croatia

The paper analyses the impact of euro adoption on the reduction of borrowing costs of EU member states. The results of the analysis point to the existence of a "euro premium" – after controlling for the dynamics in the macroeconomic fundamentals of particular countries and the market sentiment, member states of the monetary union have, on average, lower borrowing costs and higher credit ratings than other EU member states. In order to draw attention to the significance that the results could have for bank interest rates in Croatia in the event of euro adoption, a simple VAR model is used to demonstrate that there is a statistically significant transmission of the changes in government borrowing costs to interest rates on bank loans.