The magnitude of fiscal multipliers in CEE

Today, we continue the topic of fiscal impulse and the magnitude of fiscal multipliers from the perspective of triggering escape clause for defense spending. First, the size of fiscal impulse is decision at the country level. Increasing defense spending up to 1.5 percentage point would be treated favorable by the European Commission i.e. not taken into account in the Excessive Deficit Procedure when evaluating the size of the countrys budget gap. Nevertheless, we remain cautious about the extent of use of fiscal space by CEE countries. The positive effect on the economy will depend on the size of fiscal multiplier. Based on Sheremirov and Spirovska (2022) findings (using data on military spending for more than a hundred countries), annual government spending multipliers are in the range 0.750.85. Moreover, the multiplier estimates remain significant over longer horizons. The European Commission estimate of short-term fiscal multipliers is at 0.75. More important findings, however, are that the multiplier is larger in developed countries than in developing countries, under a fixed exchange rate than under a floating regime, in recessions than in expansions, and in closed economies than in open economies. Applying these conclusions to the region, we would tend to assume the fiscal multiplier to be rather weaker than stronger. Although CEE would be classified as a developed region, CEE countries are open economies, and the fiscal stimulus overlaps with expansion time. Many CEE countries are also under a floating regime.