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Has inflation been too low in Croatia? Developing an answer

The aim of this paper is to examine the rationale for maintaining low inflation rates in transition economies and particularly Croatia. The main argument I use is the connection between the Phillips curve and the inflation-growth trade-off, via the 'grease' effect of inflation on labour market adjustment. Empirical studies have estimated that the kink in the inflation-growth trade-off is higher in transition economies than in market economies, and usually no lower than 7 percent. Having said that, it follows that the maintenance of very low inflation rates in Croatia since the Stabilisation programme in 1993 might not have been beneficial for its growth.

Phillips curve; inflation-growth trade-off; transition

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