Design of fiscal consolidation packages and model-based fiscal multipliers in Croatia

Milan Deskar-Skrbic () and Darjan Milutinovic ()
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Milan Deskar-Skrbic: Croatian National Bank, Modelling Department, Zagreb, Croatia
Darjan Milutinovic: Croatian National Bank, Economic Analysis Department, Zagreb, Croatia

Public Sector Economics, 2021, vol. 45, issue 1, 1-61

Abstract: The widening fiscal deficits and the increase of public debt triggered by the COVID-19 crisis suggest that fiscal policy makers will have to engage in substantial fiscal consolidation in order to stabilize public finances in the mid run. However, the implementation of a fiscal consolidation package, if it is not properly designed, can be detrimental for growth and even lead to a self-defeating outcome. In order to avoid this undesirable scenario, fiscal policy makers should rely on growth-friendly consolidation packages. The design of growth-friendly fiscal consolidation packages requires an understanding of the size of multipliers of different fiscal instruments. Thus, in this paper we provide the first deeper insights into the size of model-based disaggregated fiscal multipliers in Croatia. For this purpose, we have built a semi-structural macro-fiscal model of the Croatian economy and used Croatia’s experience during the fiscal consolidation episode under the excessive deficit procedure (EDP) to retrieve fiscal multipliers, analyse the design of the policy package and provide model-based evaluation of the macroeconomic effects of this consolidation episode. Our results indicate that the fiscal consolidation implemented during the EDP was not growth-friendly and that it was partially self-defeating. We hope that our results can help fiscal policy makers to avoid similar policy mistakes in future fiscal consolidations.

Keywords: fiscal consolidation; fiscal multipliers; Croatia; economic modelling (search for similar items in EconPapers)
JEL-codes: C50 E12 E62 (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:ipf:psejou:v:45:y:2021:i:1:p:1-61

DOI: 10.3326/pse.45.1.1

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