Fiscal multipliers in Ukraine.

Fiscal policy plays an important stabilizing role in the Ukrainian economy. Today, even after the recent float of the Ukrainian hryvnia, fiscal policy remains key to economic stabilization. Faced with renewed crisis, durable fiscal adjustment is critical to restoring economic confidence amid heightened uncertainties and geopolitical risks. Applying a structural vector auto regression, the empirical results show that Ukraine’s near term fiscal multipliers are well below one. Specifically, the impact revenueand spending multipliers are - 0.3 and 0.4, respectively. This suggests that if a combination of revenue and spending consolidation measures were pursued, the near-term marginal impact on growth would be modest. In Ukraine, low exchange rate flexibility observed until recently implies that tax and public spending policies may have a significant effect on growth. Public spending and revenues are larger than in most Emerging European economies. However, the impact of fiscal policy on economic activity could be weakened by Ukraine’s high degree of trade openness, less developed financial markets, high sovereign risk, and growing public debt. This is the first study to estimate fiscal multipliers for Ukraine. The empirical evaluation of fiscal multipliers for Ukraine is based on the estimation of a structural vector autoregression (SVAR) model. The endogeneity of fiscal policy and GDP is addressed by applying quarterly data, as inBlanchard and Perotti (2002), over the period 2001:Q1 to 2013:Q4 for tax revenues, government spending, and GDP. The assumption is that fiscal variables impact GDP contemporaneously but GDP impacts fiscal policy decisions with a lag. Inclusion of these exogenous variables controls for changes inoutput related to changes in economic openness, monetary policy, and debt overhang, rather than changes in fiscal policy (revenue or expenditure shocks).As a result, the expanded specification helps increase the precision of revenue and expenditure multiplier estimates (Ilzetzki et al., 2010). Nevertheless, we also check the robustness of results using a specification that excludes the exogenous variables.