Sign restriction approach to macro stress-testing of the Croatian banking system

The paper employs Uhlig’s sign restriction approach to stress-testing of the Croatian banking system. The analysis is based on a standard monetary VAR comprising real economic activity, inflation and short-term interest rates augmented by the ratio of non-performing loans or return on average equity...

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Bibliographic Details
Published inFinancial theory and practice Vol. 36; no. 4; pp. 395 - 412
Main Authors Erjavec, Natasa, Cota, Boris, Jaksic, Sasa
Format Journal Article Paper
LanguageEnglish
Published Institut za javne financije 03.12.2012
Institute of Public Finance
Subjects
Croatia
macroeconomic shocks
sign restriction
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Summary:The paper employs Uhlig’s sign restriction approach to stress-testing of the Croatian banking system. The analysis is based on a standard monetary VAR comprising real economic activity, inflation and short-term interest rates augmented by the ratio of non-performing loans or return on average equity, both measures representing the aggregate banking sector. In spite of the selected indicator, the results suggest a strong sensitivity of the Croatian banking sector to macroeconomic shocks. The effects are the strongest for contractionary monetary policy shocks, followed by negative demand shocks while the effects of supply shocks turned out to be statistically insignificant. Since Croatia is a small open economy with banking the dominant financial sector, the results obtained could be interesting for policy makers in Croatia and other transition economies with similar characteristics.
Bibliography:97636
ISSN:1846-887X
1845-9757
DOI:10.3326/fintp/36.4.4