The Effect of Deflation on the Financial Markets of Croatia and Germany

Sa？etak In recent years, the term deflation has been frequently mentioned in Croation economic circles. This paper deals with said topic, presenting the influence of defla-tion and inflation on capital prices in financial markets while taking into account the examples from Croatia and Germany. The goal is to show that annual changes in de-flation directly influence capital costs in said markets. The paper is divided into units in a way that starts from defining inflation and deflation, and separating the financial markets by deflation type with examples. It deals with the correlation of interest rates, government bonds and stock prices with nominal and real interest rates. Capital Asset Pricing Model (CAPM) has been selected as a method to check the capital cost deflati-on impact because it meets the required essential assumptions. The indicated theory is proven by examples throughout the paper