Fiscal policy and economic activity in the Republic of Croatia: a cointegration analysis

The aim of this paper is to examine whether changes of fiscal policy variables i.e government revenues and government expenditures influence the real economic activity in the Republic of Croatia. Long-run relationship between fiscal policy variables and gross domestic product is examined by cointegration analysis using 'general-to-specific' approach. The impact of fiscal variables was analyzed on the basis of a forecast error variance decompositions and impulse response functions. The results indicate that an increase in government revenues will have a negative impact on real economic activity while government expenditures will have a positive impact on real economic activity only in the starting period, but in the long run are almost neutral. Reprinted by permission of the Croatian Economics Association