Application of the IS-MP-IA Model and the Taylor Rule to Croatia

Policy Implications for Economic Integration

Applying the IS-MP-IA model and the Taylor rule, this study finds that a lower expected inflation rate, real appreciation, a lower federal funds rate, and more world output would help increase the Croatian output. The insignificance of government deficit spending suggests that the Ricardian-equivalence hypothesis may be applicable to Croatia. The conventional wisdom to pursue currency devaluation to stimulate the economy may not work for Croatia.