Fiscal Policy and Household Savings in Central Europe (Poland, Croatia, and Slovak Republic) -- A Markov Switching VAR with Covid Shock

TL;DR

This paper evaluates how fiscal policies during COVID-19 affected household consumption and income in Croatia, Slovakia, and Poland using a Markov Switching VAR model, revealing country-specific effectiveness of fiscal measures.

Contribution

It introduces a Markov Switching VAR approach to analyze fiscal policy impacts on households during COVID-19 across three Central European countries, highlighting country-specific differences.

Findings

Slovakia's fiscal policies effectively supported household income and consumption.

Croatia experienced positive income effects but faced debt challenges.

Poland's measures had limited success in boosting household financial outcomes.

Abstract

This study investigates the effectiveness of fiscal policies on household consumption, disposable income, and the propensity to consume during the COVID-19 pandemic across Croatia, Slovakia, and Poland. The purpose is to assess how variations in government debt, expenditures, revenue, and subsidies influenced household financial behaviors in response to economic shocks. Using a Markov Switching VAR model across three regimes: initial impact, peak crisis, and recovery.This analysis captures changes in household consumption, disposable income, and consumption propensities under different fiscal policy measures. The findings reveal that the Slovak Republic exhibited the highest fiscal effectiveness, demonstrating effective government policies that stimulated consumer spending and supported household income during the pandemic. Croatia also showed positive outcomes, particularly in terms of income, although rising government debt posed challenges to overall effectiveness. Conversely, Poland faced significant obstacles, with its fiscal measures leading to lower consumption and income outcomes, indicating limited policy efficacy. Conclusions emphasize the importance of tailored fiscal measures, as their effectiveness varied across countries and economic contexts. Recommendations include reinforcing consumption-supportive policies, particularly during crisis periods, to stabilize income and consumption expectations. This study underscores the significance of targeted fiscal actions in promoting household resilience and economic stability, as exemplified by the successful approach taken by the Slovak Republic.