The effects of fiscal policy in a small open transition economy: The case of Croatia

Deskar-Škrbić, Milan and Šimović, Hrvoje and Ćorić, Tomislav (2014) The effects of fiscal policy in a small open transition economy: The case of Croatia. Acta Oeconomica, 64 (Supple). pp. 133-152. ISSN 0001-6373

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Abstract

In this paper, we use the structural VAR model to analyse the dynamic effects of (discretionary) fiscal shocks on the economic activity of the private sector in Croatia between 2000 and 2012. Due to the fact that Croatia is a small open transition economy, we assume that shocks of foreign origin can have notable effects on its performance. Therefore, the original Blanchard-Perotti identification method is extended by introducing variables that represent external (foreign) demand shocks. The results show that government spending has a positive and statistically significant effect on private aggregate demand and private consumption, and that net indirect taxes have a negative and statistically significant effect on private consumption and private investment.

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