Exchange rate pass-through and monetary policy in Croatia

Exchange rate targeting is considered to be the best policy option in dollarized economies if wages and prices are indexed to the exchange rate. Croatia is a highly dollarized economy; however, our empirical investigation does not reveal a high exchange rate pass-through after stabilization. This finding is robust to different methodologies and suggests that dollarization is limited mostly to financial assets. Therefore, strict exchange rate targeting may not necessarily be the best policy option for Croatia. However, policy implications must be drawn with care due to the endogeneity of the pass-through to the policy regime. (C) 2004 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.