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What is the Nature of the Dynamics between Government Spending and Aggregate Output in the Nordic Countries?

Marko Senekovič

Abstract


The main aim of this paper is to examine the relationship between government
consumption and aggregate output in five Nordic countries in two different
scenarios: first, in periods when government consumption increases and,
second, in periods when government consumption decreases. Therefore, the
nonlinear ARDL model is applied to test for the presence of a short-run and
long-run asymmetry in output response to government consumption. The key
findings are as follows. First, based on the linear model, a positive connection
between government consumption and economic activity has been confirmed,
both in the short and long term, which is also in line with the predictions of
economic theory. Second, based on the nonlinear model, six out of ten shortterm
coefficients are statistically significant, as are six out of ten long-term
coefficients, with statistically significant asymmetry detected in four out of
ten cases. Thus, estimated test statistics and graphical analysis suggest the
presence of a negatively inclined asymmetry in the relationship between
government consumption and the dynamic of aggregate output with stronger
output response in periods when government consumption decreases.

Keywords


fiscal policy, Nordic countries, nonlinear ARDL model

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