MODELLING GOODS EXPORT FUNCTION FOR CROATIA AT THE TIME OF RECESSION

As a small open economy, Croatia depends on foreign demand (i.e., export) rather than domestic demand to spur an economic recovery. Keeping in mind that domestic demand contributed to deteriorating price competitiveness of traded goods in the precrisis period, we examine whether a decrease in domestic demand increased the export of goods. Given that real depreciation happened simultaneously with a decrease in domestic demand, our main research hypothesis is that decreasing domestic demand and real depreciation during the recession affected Croatian export of goods (depending on the level of technology specific to industrial sector). The results show that real depreciation and reduction in domestic demand increased exports in low-technology manufacturing. Although there are some indications that the collapse of domestic demand also contributed to growing exports of middle-technology products, this cannot be verified. We find no association for high-technology products. These findings suggest that the effects of decreasing domestic demand and real depreciation on the export of goods in Croatia during the recession were different across industries with different levels of technology.