2. 4. 2025

Non-Linearity of Government Spending Multiplier: The Case of a Small Open Economy

Daniel Štodt

This study focuses on the non-linearity of fiscal multipliers in the Czech Republic and their dependence on the phase of the economic cycle. Using an STVAR model, the variability of fiscal multipliers across different economic phases is analyzed. The findings show that fiscal multipliers are higher during recessions (1–1.5) and lower during expansions (0–0.5), aligning with the general scientific consensus. The study also suggests that as the strength of an economic expansion gradually declines, multipliers gradually increase. These results emphasize the effectiveness of fiscal policy during recessions and its importance in stabilizing aggregate demand. However, the research highlights limitations caused primarily by the short available data series and the limited number of recessionary episodes in the Czech Republic, which may impact the generalizability of the findings.

JEL codes: C32, E62, H30

Keywords: Business cycle, fiscal multipliers, STVAR

Issued: March 2025

Download: CNB WP No. 3/2025 (pdf, 1.6 MB)

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