Inflation, growth and happiness: assesssing Croatia's stabilisation policy

• Main Author: Malesevic, Lena
• Published: Staffordshire University 2007
• Subjects: 339.5094972
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.487026

This thesis investigates inflation in transition countries, and Croatia in particular, and its relationship with growth and happiness. A special emphasis is put on analysing the early transition period and a special effort is made to account for this period appropriately. Our first interest is to find the main culprits for the initial outburst of inflation in transition. Furthermore, one of our research aims is to analyse the main determinants of inflation in transition countries· and investigate whether they differ from those in market economies. We contribute to the empirical literature that investigates the sources of inflation via a thorough analysis that identifies the exchange rate as the primary factor in influencing inflation in Croatia, followed, to a minor extent, by wage growth. It has often been argued that Croatia achieved remarkable results in reaching and maintaining price stability. However, we investigate whether this low inflation has had costs in terms of sacrificed GDP growth. Namely, there are grounds to believe that the impact of inflation on GDP growth may be non-linear in such a way that at lower rates it influences growth positively and at higher rates negatively. These arguments are investigated through a comprehensive empirical analysis that particularly concentrates on finding any 'kink' in this relationship. We find evidence that this inflexion point is not higher in transition countries than in developed economies, as implied by some papers. This finding on the impact of inflation on growth is then related to the relationship between inflation and happiness. This is because it is usually presumed that people dislike inflation and like growth and that policy-makers put more weight on inflation. However, it is possible that the public perceive these key macroeconomic variables and their importance in a different way than policy-makers do, and that their preferences may have changed during transition. Consequently, we empirically assess the relationship between inflation, unemployment and GDP growth on the one hand, and happiness on the other, in a set of transition countries. We find that people put more weight on unemployment than on inflation or GDP growth. In light of the relationship between inflation and growth on the one side, and inflation and happiness on another, we then assess Croatia's Stabilisation Programme.