FROM CAPITAL SURGES TO CAPITAL DROUGHT IN A SMALL INTEGRATED ECONOMY - LESSONS FROM CROATIA

For its specificities in the transition path, the composition of capital that it attracted throughout the previous two decades and an unusually long recession in the post-financial crisis period, Croatia serves as a very informative case study of determinants and implications of capital flows in a small integrated economy. This paper aims at measuring the temporal dynamics of influences of domestic and external factors on the variance of four main types of capital inflows to Croatia and analysing policy implications stemming from the results. The empirical analysis employing a SVAR model revealed that, amongst other things, the inflows of equity capital were under a dominant influence of eurozone indicators, while the debt flows were under a more significant influence of domestic factors. The paper extensively discusses the implications of these findings and carries out policy recommendations for policy makers in a wider range of small integrated economies.