Estimating fiscal multipliers for North Macedonia: a structural vector error correction model

Abstract

The aim of this research is to evaluate the effectiveness of fiscal policy as a means of influencing output in North Macedonia. We apply a VEC model, and use quarterly data for the period 2000q1-2019q4. Our findings suggest that the possibility of fiscal policy to be used as a short-term stabilization tool was limited by the turbulent early phase of transition and several IMF arrangements; the exchange rate peg; and the scarcity of financial resources. The results of the baseline model suggest that a government spending shock is more effective as a stabilization fiscal tool in Macedonia, compared to a tax shock, although fiscal multipliers smaller than one suggest that the effectiveness of fiscal policy in boosting output is limited. The findings confirm the importance of structural characteristics, suggesing that not accounting for monetary policy reaction and debt dynamics will result in an overstatement of fiscal multipliers. In
 particular, the results suggest that the “crowding out” effect of fiscal policy due to interest rate pressure is absent and that monetary policy is accommodating an expansionary fiscal policy. The results of our investigation suggest that an increase in government expenditures will induce a significant increase in taxes. Moreover, although an increase in spending/taxes will result in a short-lived increase/decrease in public debt, as a priori expected, we find a long-equilibrium relationship between government spending and taxation suggesting that debt sustainability is not an issue in the case of Macedonia.