—This paper studies the macroeconomic and
financial implications of large capital inflows in a small
integrated economy by examining the case of Croatia and other
EU new member states. Croatia was one of the countries that
have experienced very large, dominantly debt inflows in the
pre-crisis period. The question of implications of capital inflows
is an important one, due to the fact that they have created
dangerous macroeconomic imbalances, along with policy and
prudential challenges for the policy holders. The analysis has
shown that capital inflows positively impacted economic growth
in the pre-crisis period and accelerated the development of the
financial system in Croatia and EU NMS as well, but also fueled
higher inflation rates, worsened current account balances,
increased the indebtedness of countries and appreciated real
exchange rates, which created severe policy challenges when the
crisis hit. The contribution of the paper is reflected in
emphasizing the importance of differentiating between types of
foreign financing, given that short-term debt flows provide
more exposure to potentially harmful macroeconomic and
financial imbalances than long-term equity financing.
—Capital inflows, economic and financial
implications, EU new member states, small integrated economy.
T. Globan is with the Faculty of Economics and Business, University of
Zagreb, Croatia (e-mail: firstname.lastname@example.org).
Cite: Tomislav Globan, "The Prizes and Pitfalls of Large Capital Inflows in a Small Integrated Economy — Case of Croatia," International Journal of Trade, Economics and Finance vol.5, no.3, pp. 235-243, 2014.