Agata Szymańska

Institute of Economics, University of Lodz,

Poland

agata.szymanska@uni.lodz.pl

ORCID 0000-0001-5184-931X

Analysis of the effects of fiscal policy shocks in the Baltic region

Abstract. The study aims to compare the effects of fiscal policy shocks in three Baltic countries – Estonia, Latvia, and Lithuania - within SVAR framework, using the identification scheme proposed by Blanchard and Perotti (2002). The time sample covers quarterly data over the period of 2002q1-2019q4. The main idea of the study is to identify the effects of fiscal policy shocks in three euro area member states under a single monetary policy of the European Central Bank, but with country-specific fiscal policy shaped by the European fiscal framework. The results show that, generally, in the short term (up to four quarters), output reacts consistently with the Keynesian view, emphasizing the importance of using discretionary fiscal policy tools in stimulating economic activity in the Baltic region. However, in Estonia and Latvia, the calculated impact multipliers for net taxes are larger than spending multipliers. Although each country reacts differently to its country-specific fiscal shock, the response to the euro area money market interest rate innovation is quite similar with respect to the direction of the effect, which may indicate the robustness of the Baltic region in terms of the euro area shocks. Thus, the results emphasize the importance of conducting domestic fiscal policy adapted to the conditions of each of the analysed economies. Based on the assumptions and the methodology used in this study, the obtained findings show the limited effects of spending on Baltic economies in comparison with the effects caused by the shocks in net taxes. Moreover, due to the lack of large-scale analysis regarding the effectiveness of fiscal policy in Baltic states, the obtained results are a valuable contribution to the debate about the ‘appropriate’ size of the fiscal multipliers for the Baltic region.

Received: August, 2021

1st Revision: May, 2022

Accepted: June, 2022

DOI: 10.14254/2071-8330.2022/15-2/15

JEL Classification: C20, E62, H20

Keywords: fiscal multiplier, SVAR, money market shock, fiscal shock, social benefits, Estonia, Latvia, Lithuania