Impact of External Shocks on Domestic Inflation and GDP

Published: 11/1/2011
Publication Working Papers
Issue W - 26
Authors Ivo Krznar and Davor Kunovac
Date December 2010
JEL E58, F41, F42
ISSN 1334-0131


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.