The Empirical Evaluation of Monetary Policy Rules in the Small Open Economy DSGE Model: Evidence from Croatia

The aim of this article is to empirically evaluate the compliance of four different monetary policy rules in the DSGE model with empirical characteristics of a small open economy. The small open economy is represented by Croatia, while the large foreign sector is represented by the euro area without Croatia. The new Keynesian small open economy DSGE model with four monetary policy rules is calibrated. Since the essential characteristic of a small open economy is the exogeneity of foreign variables, to empirically test the effects of shocks in a small open economy, the structural vector autoregression (SVAR) model with block exogenous restrictions is estimated and euro area variables are treated as exogenous. The impulse response functions analysis points to the conclu- sion that fixed exchange rate suits the best to the empirical impacts of analysed shocks in Croatia. The results of the research are important in the context of recent accession of Croatia to the euro area and the monetary policy design in small open economies.