THE MACROECONOMIC EFFECTS OF FISCAL CONSOLIDATION AFTER CRISES: EVIDENCE FROM A SMALL OPEN ECONOMY

Faton Sulejmani () and Dragan Tevdovski
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Faton Sulejmani: Faculty of Economics-Skopje, Ss. Cyril and Methodius University in Skopje, North Macedonia

No 11, Proceedings of the International Conference "Economic and Business Trends Shaping the Future" from Faculty of Economics-Skopje, Ss Cyril and Methodius University in Skopje

Abstract: This paper investigates the macroeconomic effects of fiscal policy in North Macedonia, with a focus on fiscal consolidation episodes after major crisis periods, including the Global Financial Crisis (2008–2009), the COVID-19 pandemic (2020), and the recent inflationary and energy shocks (2022–2023). We estimate a structural vector autoregression (SVAR) model with recursive identification to analyze the dynamic responses of key macroeconomic variables to discretionary fiscal tightening, captured by positive shocks to the cyclically adjusted primary balance (CAPB). The model includes domestic variables—output gap, interbank interest rate (SKIBOR), and inflation—alongside exogenous indicators of Eurozone economic conditions. The empirical results show that fiscal consolidations have contractionary effects in the short run. Output declines significantly following a tightening shock, with the output gap reaching its trough within the first two quarters. Inflation decreases moderately and persistently, while the interbank interest rate responds with a temporary decline, indicating a counter-cyclical monetary policy reaction. These findings are consistent with the Keynesian view of fiscal multipliers in small open economies and highlight the importance of fiscal-monetary coordination.

Keywords: Fiscal consolidation; Vector auto regression; Inflation; Output gap (search for similar items in EconPapers)
JEL-codes: C32 E12 E62 E63 E65 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2025-12-15
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Persistent link: https://EconPapers.repec.org/RePEc:aoh:conpro:2025:i:6:p:154-165

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