Abstract

MCI is an indicator of the combined e¤ect of short-term interest rates and exchange rates on price level and aggregate demand. In construction of the index for Croatia, Engle-Granger co-integration method of time se-ries was used. Obtained results indicate that in the observed period mone-tary policy in Croatia was mainly expansive, suggesting an easing of mon-etary conditions. However, it is necessary to bear in mind a number of limitations in the conduct of Croatian monetary policy if it is to be based on the use of the MCI. The most important constrain, that reduces the possibility of freely determining domestic interest rates and money supply, stems from a relative freedom of international capital ows between Croa-tia and other countries and the necessity of maintaining a stable nominal exchange rate due to a highly euroized economy.