POLITICAL DEMOCRATIZATION AND CENTRAL BANK INDEPENDENCE IN CROATIA

This paper analyzes the institutional framework of the central banking system in the Republic of Croatia. The degree of political and functional independence of the central bank was very low, and The Croatian National Bank (CNB) was heavily influenced by the then ruling party – Croatian Democratic Union (HDZ). This paper is concerned with the intitution building in the central banking sphere in Croatia. Asssement of the democratic legitimacy and accountability versus political independence of the central bank, is crucial part of this research paper. Political independence facilitates the task of the central bank todesign and implement monetary policy strategy consistent with price stability. “Flexible inflation targeting” monetary strategy, seems to be the most appropriate policy for the CNB. The notion of political independence is closely connected with the issue of accountability of central bank, after political democratization in Croatia, in accordance with the results of the parliamentary and presidential elections in January/February 2000. Functional independence should be based on the “separated, but shared powers” concept, or/and on the system of “checks and balances” between the monetary authorities, on theone side, and legislative and executive branch of government, on the other side. The degree of functional independence suggested in this paper, gives the central bank the means to effectively control, at discretion, money supply, but based on the “ESCB model” in the setting of (formal) exchange rate regime. Much progress shall be made in making the central banking legislation compatible with European union standards, using the E(S)CB as benchmark. Parliamentary procedure started in January of this year.