Impact of public debt (un)sustainability on fiscal policy effectiveness in Croatia

This paper analyses the impact of public debt level and (un)sustainability on fiscal spending effectiveness in Croatia. Public debt sustainability is analyzed using standard indicators of fiscal vulnerability and fiscal stability, accompanied with identification of regime changes in the public debt trajectory. Public debt sustainability analysis is used to analyze trends and tendencies, as well as to indicate periods of fiscal unsustainability in Croatia in period from 2001 to 2015. Using switching regression and SVAR approach it is also empirically tested how public debt level affects the effectiveness of fiscal policy in Croatia in the same period. Results show a negative impact of recession on public debt sustainability and confirm the main thesis that public debt level significantly affects and reduces the effectiveness of fiscal policy in Croatia