At the conference Challenges of Europe: Design for the Next Generation, organised by the Faculty of Economics, Business and Tourism in Split, Davor Kunovac, executive director of the CNB Research Area and Milan Deskar-Škrbić, director of the Monetary Policy Department, organised special sessions on central banking, with participation of CNB researchers as well as colleagues from the European Central Bank (ECB) and the British central bank (Bank of England).

Davor Kunovac, Milan Deskar-Škrbić and Lana Ivičić (Macroprudential Policy and Financial Stability Department), moderated special sessions on inflation, monetary policy and financial stability, presenting thirteen research papers.

Ivan Mužić from the Monetary Policy Department presented the paper Price Effects of Joining the Euro Area: Evidence from Croatia dealing with the early effects of the introduction of the euro on prices in Croatia, co-authored with Michael Weber (University of Chicago), Jurica Zrnc and Ivan Žilić (both from the CNB). The paper analyses micro database data on prices, with the authors concluding that the effect of the introduction of the euro on prices was relatively moderate. The authors also show that the introduction of the euro in Croatia was accompanied by a decrease in consumer perception and expectations of inflation.

Jurica Zrnc from the Monetary Policy Department presented the paper Loan Supply and Prices (co-authored with Martin Pintarić from the same department), which analyses the transmission of bank loan supply shocks to prices. The results show that due to negative loan supply shocks enterprises increase prices because of rising financing costs. The market power of enterprises is an important factor that determines the strength of the transmission of financial shocks to prices. The analysis also shows that negative financial shocks increase the effect of growing energy costs on prices. The analysis is also relevant given the discussions on the potential adverse effects of monetary policy tightening on financial stability and the ensuing inflation.

The following paper was The Regional Effects of Monetary Policy in the Euro Area: Does One Size Fit All or None?, by Karlo Kotarac from Valcon and Davor Kunovac and Ozana Nadoveza from the CNB Monetary Policy Department. The paper uses the structural dynamic factor model to analyse the business cycles of 165 regions in 11 euro area countries. The paper first analyses the contribution of symmetrical and asymmetrical shocks to regional economic activity and then the reaction of regional GDP to ECB's monetary policy shocks. The results show that symmetrical shocks are, on average, the dominant drivers of regional cycles, followed by country-specific shocks. Region-specific shocks on average have proved to be the least important. On the other hand, the economic activity of most countries on average reacts to ECB's monetary policy shocks in a similar way as the economic activity of the euro area, but with a noticeable regional heterogeneity. Specifically, the regional cycles of the countries whose business cycles are occasionally out of step with the aggregate cycle of the euro area (Spain, Ireland, Greece and Portugal) have mostly been caused by asymmetrical country wide shocks, rather than region-wide shocks. However, regional factors play a key role in the heterogeneity of regional reactions to ECB's monetary policy shocks in the countries whose national monetary policy would strongly correspond to that of the ECB (France, Italy, Belgium and the Netherlands). Therefore, the authors conclude that the characteristics of the euro area related to the criteria of an optimal currency area are very similar, irrespective of whether they are analysed on a regional or a national level.

Ivan Žilić from the Economic Analysis Department presented a joint paper with Ivan Mužić from the Monetary Policy Department, entitled Price Regulation in a High Inflation Environment: Lessons from Dairy Products in Croatia, dealing with the effects of price caps on food products, introduced in September 2022. The paper analyses how the freezing of the prices of long-life milk with 2.8% milk fat influenced the price and availability of the limited item, but also of the substitutes: other types of milk. On a sample of shops from Croatia, Slovenia and Bosnia and Herzegovina, used as control groups, the authors establish that the milk whose price had been frozen was on average 35% cheaper than it would have been had the price not been limited, while no additional rise in the prices of other types of milk caused by this measure was recorded. The authors also find that there were no shortages of long life milk, because the limited item was available in shops, but observe that close substitutes of the milk whose price had been frozen became relatively more accessible in shops. The authors, based on detailed household consumption data, conclude that the effect of this measure on the decrease in overall inflation was negligible, but that there is a distribution gradient because low-income households benefited more from this measure.

On the third day of the conference, Bono Beriša from the Macroprudential Policy and Financial Stability Department presented his paper Do Specialised Banks Lend to Croatian Zombies? The paper examines how banks with a high exposure in a specific sector manage to reduce lending to insolvent enterprises and the resultant worsening of their credit portfolios. The analysis also controlled the so-called soft information, which can also indirectly show a bank's exposure to a business entity. Covering the period from 2011 to 2021, the author shows that the larger specialisation of a bank results in some zombies receiving less additional lending than sound companies. However, the relationships between banks and insolvent companies can play a key role in further lending. Specifically, the length of the relationship between a bank and business entities and an increased share of banks in a company's debt may further reduce the supply of loans, while some zombies receive additional financing based on a longer interaction between them and the bank. In addition, taking into account company characteristics as shown in the financial statements, it is established that banks grant more loans to smaller, more liquid, more profitable, more capitalised and younger companies. Also analysed is the case when zombie companies look for a new bank because the previous lender has withdrawn, when, depending on the zombie company definition, the portfolio quality of the banks that has acquired the zombie companies may deteriorate.

The last presented paper was by Maja Sabol from the Monetary Policy Department, Easier Said than Done: Predicting Downside Risks to House Prices in Croatia, co-authored with Tihana Škrinjarić from the Bank of England. The research by these two authors is the first of its kind for the Croatian real estate market. The quantile regression method identifies the main risk factors (real GDP, interest rates, housing loans and the number of construction permits) for house price-at-risk (HaR) for the period from the first quarter of 2002 to the third quarter of 2022. The paper also assesses negative risks for developments in the real prices of real estate in the forthcoming period. Based on empirical analyses, the authors conclude that negative risks in the residential real estate market have increased in recent years and that the possibility of price correction in the following period has also increased. The proposed approach is useful for the monitoring of uncertainties surrounding the projections of the real prices of real estate and the identification of factors that affect prices. The results obtained are important for a number of policies that influence the residential property market. This research is especially significant for macroprudential policymakers and serves as a starting point for the monitoring of systemic risks to financial stability.

The following papers by colleagues from the ECB and BoE were also presented at separate sessions:

Monetary policy and the effects on inflation of green transition, Alessandro Ferrari (ECB) and co-authors

Monetary and macroprudential policy: friends or foes?: Insights from an extended 3D DSGE model, Mara Pirovano (ECB) and Michele Azzone (Politecnico di Milano)

Some implications of micro price setting evidence for inflation dynamics and monetary transmission, Luca Dedola (ECB) and group of authors

Price adjustment in the euro area in the low inflation period: evidence from consumer and producer micro price data, Sergio Santoro (ECB) and group of authors

Inflation heterogeneity at the household level, Georg Strasser (ECB) and group of authors

Macroprudential policy in the high inflation environment: Sailing unchartered waters, Carsten Detken (ECB), Jan Klasco (NBS), Reiner Martin (NBS)

An Unconventional FX Tail Risk Story, Eddie Gerba (Bank of England) and co-authors