Determinants of non-linear effects of fiscal policy on output: The case of Bulgaria

Abstract

The paper illuminates the non-linear effects of the government budget on short-run economic activity. The study shows that in the Bulgarian economy under a Currency Board Arrangement the tax policy impacts the real growth in the standard Keynesian manner. On the other hand, the expenditure policy exhibits non-Keynesian behavior on the short-run output: cuts in government spending accelerate the real GDP growth. The main determinant of this outcome is the size of the discretionary budgetary changes. The results imply that the balanced budget rule improves the sustainability of public finances without assuring a growth-enhancing effect.