The power of fiscal multipliers in Croatia

Abstract

This paper investigates fiscal multipliers in Croatia in the period 1996Q1-2011Q4. For this purpose, a Blanchard Perotti three variable baseline SVAR is employed as a no regime-switch model, along with a four variable baseline STVAR as a regime-switch model. Results show that during recessions fiscal multipliers in Croatia tend to be much larger and move in line with Keynesian assumptions, i.e. a positive government spending shock increases output, private consumption and private investment, while oppositely a positive tax shock worsens the same macroeconomic variables. Moreover, during recession times government spending for purchases of goods and services seems to be the most effective fiscal instrument for boosting economic activity.