Page 35 - Azerbaijan State University of Economics

Fatih Chellai: Regime-Dependent Effects of Public Spending in Algeria: A Structural VAR and
Markov-Switching Approach

LITERATURE REVIEW
The relationship between public spending and economic performance is a vast and complex
area of research, having been the subject of numerous theoretical and empirical studies. This
section explores the main contributions of the literature, focusing on relevant theoretical
frameworks, varied empirical results, and the application of SVAR models in this context.

Several economic theories attempt to explain the impact of public spending on economic
activity. Wagner's law postulates a positive relationship between economic growth and
increased public spending, arguing that economic development leads to increased demand
for public services. Conversely, Peacock and Wiseman's theory suggests that public
spending increases in stages in response to social or political shocks, and then remains at
a higher level. From a Keynesian perspective, public spending can stimulate aggregate
demand, particularly during periods of underemployment, leading to a multiplier effect
on national income. However, classical and neoclassical economists warn of the
crowding-out effect, where increased public spending financed by borrowing can raise
interest rates and reduce private investment. Endogenous growth theory includes public
spending, particularly on education, health and infrastructure, as factors that can improve
productivity and stimulate long-term growth.

Empirical findings on the impact of public spending on economic growth, inflation
and unemployment are mixed, and often depend on the specific context (country,
period, type of spending). Several studies have used VAR (Vector Autoregressive)
and SVAR (Structural Vector Autoregressive) models to analyze these relationships.
SVAR models are particularly wellsuited because they can identify structural shocks
(e.g., a fiscal policy shock) and analyze their dynamic effects on macroeconomic
variables, unlike reduced VAR models, which do not distinguish between structural
and reduced shocks (Amisano & Giannini, 1997).

For example, Afonso and Leal (2019) examined fiscal multipliers in the eurozone using
SVAR analysis, showing varying effects across countries and expenditure types. Akpan
and Atan (2015) applied an SVAR approach to study the macroeconomic effects of
fiscal policy shocks in Nigeria, an economy also dependent on natural resources, finding
significant impacts on GDP and inflation. Similarly, Rodríguez (2018) analyzed the
dynamic effects of public spending shocks in the US, while Deleidi and De Lipsis
(2018) also used an SVAR approach for fiscal multipliers in the US.

With regard to inflation, Nguyen (2019) studied the impact of public spending on inflation
in emerging Asian economies, while Asandului et al. (2021) examined the asymmetric
effects of fiscal policy on inflation and economic activity in post-communist European
countries. These studies highlight the complexity of transmission channels and the need
to consider the institutional and structural specificities of each economy.

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