Fiscal Consolidation, External Competitiveness and Monetary Policy : A Reply to the WIIW

Recent studies of policy alternatives for Croatia prepared by the WIIW contend that fiscal discipline in Croatia remains weak, and argue for a policy mix of tighter fiscal policy and looser monetary policy aimed at achieving nominal exchange rate depreciation. In this reply, we argue that substantial fiscal adjustment is already taking place and that the goal of sustainablefiscaldeficitsisachievableinthemediumterm.Inaddition,wearguethatCroatia’strade problemshaveagreatdealtodowithproblemssuchasexclusionfromfreetradeareasanddomestic, bureaucratic barriers to domestic investment and FDI. Attempts to achieve substantial nominal depreciation, if technically viable at all, may not even create real depreciation. Theymayalsohaveunacceptableconsequencesforinflationandeventhecurrentaccountdeficit,giventheapparentlylowelasticityofCroatianexportsandhighdependencyonimported intermediate goods.