The power of fiscal multipliers in Croatia

Abstract

This paper investigates fiscal multipliers in Croatia in the period 1996Q1-2011Q4. To do so 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 deteriorates the same macroeconomic variables. Moreover, during recession times government spending for purchases of goods and services seem to be the most effective fiscal instrument in boosting economic activity.