Does the Foreign Income Shock in a Small Open Economy DSGE Model Fit Croatian Data?

Sa？etak The paper compares theoretical impulse response functions from a DSGE model for a small open economy with an empirical VAR model estimated for the Croatian economy. The theoretical model fits the data well as long as monetary policy is modelled as a fixed exchange rate regime. The paper considers only a foreign output gap shock. A positive foreign shock increases domestic GDP and prices and decreases terms of trade, which is in compliance with theoretical assumptions. Interest rates behave differently than suggested by the estimated DSGE model, which could be explained with an unconventional interest rate transmission channel in Croatia