More than just supply and demand: Macroeconomic shock decomposition in Croatia during and after the transition period.

• We analyze aggregate shocks decomposition in Croatia. • Domestic shocks were dominant during the transition period. • External shocks became dominant after financial and trade liberalization in 2000. • In the short run, business cycle fluctuations are driven by domestic AS shocks. • In the medium run, fluctuations are driven by external AD shocks. This paper separates macroeconomic shocks into external and domestic aggregate demand and supply shocks in Croatia during and after the transition period using a Bayesian SVAR model. The standard decomposition into aggregate demand and supply shocks covers important information on external sources of economic fluctuations. We find that domestic shocks were a dominant source of fluctuations during the transition period from 1992 to 2000. External shocks increased their importance after 2000, becoming the dominant source of fluctuations with the Global financial crisis. International comparison with other EU post-transition countries shows that short run GDP fluctuations are best explained by domestic aggregate supply shocks in 9 out of 11 analyzed countries, including Croatia. However, in the medium run, GDP fluctuations are dominantly explained by external aggregate demand shocks in 8 out of 11 countries, including Croatia. Inflation in Croatia is driven by external shocks both in the short- and medium run. [ABSTRACT FROM AUTHOR]