Keywords

financial conditions index, GDP, Croatia, eurozone, principal component analysis, VAR mode

The main aim of this paper is to analyse the interrelation between domestic and external financial conditions and economic activity. For this purpose, an overall Financial Conditions Index (FCI) for Croatia was constructed, together with two subcomponents - domestic and foreign - used to estimate a VAR model of interdependence between financing conditions and real economic activity in Croatia and in the eurozone. The results of the estimated model indicate that financing conditions in Croatia are primarily determined by domestic GDP and external financial conditions, while a variance decomposition estimate, with these two variables, also points to foreign GDP as an important determinant of the variability of domestic economic and financial activity indicators.