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

Author

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  • Daniel Stodt

Abstract

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.

Suggested Citation

  • Daniel Stodt, 2025. "Non-Linearity of Government Spending Multiplier: The Case of a Small Open Economy," Working Papers 2025/3, Czech National Bank, Research and Statistics Department.
    • Handle: RePEc:cnb:wpaper:2025/3
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    More about this item

    Keywords

    Business cycle; fiscal multipliers; STVAR;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

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