FISCAL POLICY AND ECONOMIC ACTIVITY IN THE REPUBLIC OF CROATIA: A COINTEGRATION ANALYSIS

The aim of this paper is to examine whether changes of fi scal policy variables i.e. government revenues and government expenditures infl uence the real economic activity in the Republic of Croatia. Long-run relationship between fi scal policy variables and gross domestic product is examined by cointegration analysis using “general-to-specific” approach. The impact of fi scal 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.