Testing Monetary Sovereignty and Structural Inflation Shifts: Evidence from Croatia’s Euro Transition (2000–2024)

This paper examines how Croatia’s transition from monetary sovereignty to euro adoption reconfigured the structure of inflation transmission between 2000 and 2024. Using a two-stage empirical framework grounded in Modern Monetary Theory (MMT), the study first tests the Decoupling Axiom through a Panel ARDL model across Croatia and comparable CEE donor economies, confirming that pre-euro policy interest rates operated independently of fiscal stance—demonstrating functional monetary sovereignty. Results — as the second stage — from the Hybrid Bayesian Structural Time Series (BSTS) model reveal a structural inversion in inflation dynamics: asset-based channels, represented by new housing markets, contract markedly after euro adoption, while consumer sectors display persistent upward transmission. The redistribution of price pressure from assets toward consumption suggests a systemic reorientation of inflation’s internal structure following the loss of monetary sovereignty. Validated through CausalImpact and Gsynth robustness checks, these findings confirm that euro adoption strengthened nominal stability while simultaneously opening a delayed channel for consumption inflation—a result fully consistent with MMT’s prediction of asymmetric inflation under a shared monetary regime.