1
Marko Senekovič: What is the Nature of the Dynamics between Government Spending and Aggregate Output in the Nordic Countries?
What is the Nature of the Dynamics 
between Government Spending 
and Aggregate Output in the Nordic 
Countries?
Marko Senekovič
Assistant at the Department of Political Economy and a PhD Student at 
the University of Maribor, Faculty of Economics and Business, Slovenia
marko.senekovic1@um.si
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 short-
term 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
Introduction
In the macroeconomic sense, the new millennium has shaken the foundations 
of economic science and called into question the predictive and explanatory 
power of economic theories developed on the shoulders of great economic 
minds and economic experiences of the 20th century. Although at the turn 
of the millennium macroeconomics may have functioned more and more 
as a sophisticated science based on rigorous mathematical models and bold 
assumptions and some even dared to compare them with certain physical 
models based on known laws of nature, economic developments over the 
past two decades thoroughly shook mainstream economics. By no means 
that economic theory and institutions of economic policy were wrong. On 
the contrary, most of the accumulated knowledge may even fully correspond 
to these times within given economic circumstances. Macroeconomics has 
run into difficulties because of prescribing the existing medicine to new 
ORIGINAL SCIENTIFIC PAPER
RECEIVED: JANUARY 2022
REVISED: JANUARY 2022
ACCEPTED: FEBRUARY 2022
DOI: 10.2478/ngoe-2022-0001
UDK: 330.567.4:336.1(4-17)
JEL: C22, E60, E62
Citation:  Senekovič, M. (2022). 
What is the Nature of the Dynamics 
between Government Spending 
and Aggregate Output in the Nordic 
Countries? Naše Gospodarstvo/Our 
Economy, 68 (1), 1-13.  
DOI: 10.2478/ngoe-2022-0001.
This work is licensed under 
a Creative Commons Attribu-
tion-NonCommercial-NoDeriva-
tives 4.0 International License.
NAŠE GOSPODARSTVO
OUR ECONOMY
Vol. 68 No. 1 2022
pp. 1–13

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NAŠE GOSPODARSTVO / OUR ECONOMY Vol. 68 No. 1 / March 2022
economic problems, which is problematic due to the basic 
nature of social and, thus, economic development which 
has underlying characteristics of a constantly changing 
living organism that actively responds to stimuli and new 
information. Even though at first some new discoveries 
may seem like everlasting laws or assumptions, they can 
quickly trigger different behavior of those same actors in 
the economy, based on which some economic laws or as-
sumptions were initially detected at all.
So, we have experienced several economic shocks, to 
name just the biggest, the global financial crisis with a 
prolonged debt crisis in the euro area, then, a period of de-
flationary pressures partly offset by large scale monetary 
measures, and, finally, the rise of the centennial epidemic 
and related economic shocks which still require extreme 
caution by the economic policy to maintain business cycle 
stability, even though threats of higher inflation persist. 
It is economic policy, both monetary and fiscal, that has 
come under severe scrutiny and criticism (Bernanke, 
2019). If we focus only on the scientific debate and ignore 
the institutional malfunctions that are partly embedded in 
the system (Reichlin, 2020), especially in the euro area, 
we can recognize that in the last decade some alternative 
macroeconomic narratives have risen to the surface, for 
example, the theory of secular stagnation (Summers, 
2016), the so-called permanent and persistent state of un-
derutilization to which, until recently, the mainstream eco-
nomics did not pay even the slightest attention. Although 
inflationary pressures emerged in 2021, this perception 
of inflationary pressures required more than a decade of 
extremely loose monetary policy, historically benevolent 
fiscal transfer policies, and supply-side shocks in terms of 
relatively large output constraints accompanied by unex-
pected structural turbulences (Andre et al., 2021).
Consequently, it is quite understandable to pose questions 
that address the issues of efficiency of economic policy 
where especially monetary policy is under severe pres-
sures because of the interest rates near zero lower bound, 
which certainly reduces the potency of monetary policy in 
a function of the business cycle stabilizer. From this, it is 
logical that the focus of research has been shifted to the 
field of fiscal policy and its instruments where the trans-
mission mechanism is yet to be fully explained (Ahuja & 
Pandit, 2021). Although in the last decade a macroeco-
nomic framework has been reestablished within which 
fiscal policy has gained significance relative to the period 
before the Great Recession (Shambaugh, 2019), a detailed 
analysis of the effectiveness of fiscal stimuli within dif-
ferent scenarios and circumstances remains unclear. The 
main emphasis of the current research is, therefore, on the 
analysis of the short and long-run effects of fiscal policy 
on economic growth with a special focus on the impact 
of structural characteristics of countries and dynamics of 
the business cycle on the effectiveness of fiscal measures 
which may help to elucidate fiscal policy transmission 
mechanism. One of these peculiarities is the presence 
of nonlinear processes in the relationship between fiscal 
spending and economic activity.
The main goal of this paper is, therefore, to analyze thor-
oughly the connection between government spending and 
aggregate output via the application of linear and nonlinear 
autoregressive distributed lag (ARDL) models on the new 
sample of five Nordic economies. According to economic 
theory, there is a positive relationship expected between 
government spending and the dynamics of output, thus 
both variables should be moving in the same direction, 
which can be tested with the linear model. However, the 
main interest is to determine whether the output response 
to either positive or negative dynamics in government 
spending is equal in its magnitude or, in other words, 
whether we can expect asymmetric output response in 
those two different scenarios. A nonlinear ARDL model 
is used to assess the presence of the aforementioned 
economic phenomenon.
The remainder of this study is comprised of the following 
chapters. Chapter 2 provides some insights into the nature 
of the relationship between government spending and 
economic activity through an overview of the relevant em-
pirical literature with a special focus on Nordic countries. 
In chapter 3, we present the methodological framework 
used in this paper and, in chapter 4, we briefly describe 
the dataset that enters our analysis. Results are listed, 
explained, and interpreted in chapter 5 while chapter 6 
concludes.
Empirical Literature Review
In this chapter, we present the key findings of the empir-
ical literature in the field of examining the effectiveness 
of fiscal policy in ensuring sustainable and stable rates of 
economic growth. At the same time, we also review the 
main characteristics that, according to the latest findings, 
affect the effectiveness of fiscal incentives. Some esti-
mates of fiscal multipliers along with specific character-
istics, structural and dynamic, that determine the size of 
multipliers are also elaborated. Moreover, special atten-
tion is dedicated to studies that consider the sample of 
Nordic countries.
The foundations for the study of the transmission mech-
anism of fiscal policy and the effectiveness of fiscal 
stimulus were laid by seminal papers Blanchard and Perotti 
(1999) and Perotti (2002), which examined the impact of 

3
Marko Senekovič: What is the Nature of the Dynamics between Government Spending and Aggregate Output in the Nordic Countries?
government spending and taxes on GDP and other macro-
economic variables, such as interest rates and price levels. 
Key findings support conventional wisdom of economic 
theory and can be summarized as positive estimates of the 
government spending multiplier and negative estimates of 
the tax multiplier while the potential for fiscal stimulus to 
boost economic growth has been diminished in developed 
countries since the 1980s. On the eve of the Great Re-
cession, Giordano et al. (2007) support the notion of dis-
cretionary fiscal policy. Nevertheless, as in Blanchard and 
Perotti (1999) and Perotti (2002), limited capacity to fight 
slumps in real GDP was attributed to fiscal policy. More 
recently, Burriel et al. (2019) stressed the important role of 
discretionary fiscal policy, House et al. (2020), however, 
stated that austerity measures have led to greater falls in 
GDP over the recent decade than would be realized in the 
counterfactual scenario.
The evolution of economic research showed that estimates 
of fiscal multipliers as one of the most important metrics 
for studying the effectiveness of fiscal policy vary both 
between countries and within phases of the business cycle. 
Therefore, the focus of the empirical literature was moved 
on to the study of individual structural and dynamic 
factors that could explain this variation of the size of fiscal 
multipliers. The first set of studies examine the role of a 
business cycle and a common conclusion has emerged that 
fiscal multipliers tend to increase during recession periods 
(Auerbach & Gorodnichenko, 2010, 2011, 2014; Batini et 
al., 2012; Qazizada & Stockhammer, 2015). Nevertheless, 
some studies, for example, Ramey and Zubairy (2014), 
despite being in minority, showed that the size of fiscal 
multipliers does not necessarily differ between phases of 
the business cycle. In addition to this, Auerbach and Go-
rodnichenko (2017) showed that in times of severe and 
prolonged recession accompanied with interest rates near 
zero lower bound when monetary policy has a reduced 
capacity to stimulate the economy further, the size of 
fiscal multipliers increases. The gradual shift of attention 
to fiscal policy to ensure economic growth was greatly 
accelerated during the COVID 19 pandemic when the of-
ficials of monetary policy institutions urged fiscal policy 
authorities for a more active role, which was translated 
into massive fiscal expansion on the country and interna-
tional level (Gaspar et al., 2021; Schnabel, 2021).
The second set of studies examines the structural char-
acteristics of countries and their role in determining the 
dynamics between government spending and economic 
activity. There are some factors, namely lower public 
indebtedness, higher level of development, lower trade 
openness, periods of the credit crunch, and financial 
stress where consensus is gradually emerging in the di-
rection of higher estimated fiscal multipliers (Ilzetzki et 
al., 2013; Hory, 2016; Koh, 2017; Borsi, 2018). Neverthe-
less, certain studies also offer results that contradict the 
growing majority. Koh (2017), for example, reports that 
are not necessarily smaller in the case of higher trade and 
financial openness, fiscal multipliers and that the role of 
the exchange rate regime by determining the effectiveness 
of fiscal incentives is not clear.
As far as the analysis of the effectiveness of fiscal policy 
in the Nordic countries is concerned, there is less em-
pirical evidence available. However, certain studies 
have addressed the aforementioned problem at least in a 
somewhat broader form. Ravn and Spange (2014) note 
that fiscal policy has only a short-run impact on economic 
activity with the estimated government spending mul-
tiplier being larger than the tax multiplier. The output 
effect of fiscal stimuli is statistically significant only in 
the short run. Nevertheless, the fiscal multiplier reaches 
the value of the impact slightly above unity. Then, its 
values drop to around 0.6 in one year. The quoted authors 
also demonstrate that exogenous shocks to government 
spending account for less than 10 % of the movements 
in output over the business cycle in Denmark. Based on 
the standard structural VAR methodological framework, 
Lehmus (2014) estimates fiscal multiplier using Finnish 
data. He finds spending multipliers larger than 1 in the 
short run and tax multipliers half of that value. Yet, tax 
multipliers are more persistent in time. Furthermore, if 
public investments data are added to the public spending 
variable, the expenditure multiplier becomes more persis-
tent. Ahonen (2020) estimates with the application of the 
Bayesian time-varying parameters vector autoregression 
model on Finish economy covering for 1985-2018 that the 
government consumption multiplier has fluctuated over 
time reaching values between 1.2 and 1.85. In addition to 
this, she finds higher average values of the fiscal multipli-
er in the period 2000-2018. Nevertheless, the model does 
not provide any clear explanation for the increase in the 
cumulative spending multiplier.
Without explicit empirical research, Martorano (2015) just 
merely addresses the topic of the effectiveness of fiscal 
policy in Iceland. He compares the paths of economic 
recovery from the 2008 financial crisis in Iceland and 
Hungary and finds that the Icelandic government met 
the objectives of the IMF program by replacement of the 
previous flat tax system with a progressive tax structure 
while the Hungarian government, following a different 
strategy, had to ask for additional help. He also argues that 
Iceland, when pursuing the goal of inclusive economic 
recovery, helps to reduce income inequality with social 
transfers. For Norway, Aursland et al. (2020) find that 
the zero lower bound on nominal interest rates and 
downward nominal wage rigidity can account for higher 

4
NAŠE GOSPODARSTVO / OUR ECONOMY Vol. 68 No. 1 / March 2022
fiscal multipliers individually during recessions. In joint 
presence, however, the existence of downward nominal 
wage rigidity reduces the multiplier at the zero lower 
bound. They show that the state-dependency is robust to 
alternative assumptions about the origin of the recession, 
the nature of the fiscal stimulus, and its financing source.
Hjelm and Stockhammer (2016) use quarterly Swedish 
data set on fiscal variables, namely government consump-
tion, investments, transfers to households, indirect taxes 
on consumption goods, and direct taxes on household 
income, and estimate the effects on GDP and employment 
for the period 1980-2015. According to their results, the 
fiscal policy generally has a Keynesian effect although 
often insignificant with on average larger fiscal multipli-
ers throughout flexible exchange rate regime. In the linear 
model, government investment generates the strongest 
multiplicative effect. In the nonlinear model, however, all 
three fiscal spending variables, namely government con-
sumption, investments, and transfers to households, have 
a substantial positive impact on employment in recession 
periods while the employment just barely reacts to shocks 
in taxes. In addition to this, the results from the nonlinear 
model are sensitive to fiscal instruments and the definition 
of recession periods. Hatemi (2014) does not find support 
for a discretionary fiscal policy in Sweden. This seems to 
be the case regardless of whether the asymmetric process 
is taken into account in the estimation of the impulses 
or not. Hence, he argues that the Ricardian equivalence 
might hold in the case of Sweden. Consequently, these 
results can also be interpreted as empirical evidence that 
the stance of fiscal policy, regardless of whether it is con-
tractionary or expansionary, is not a major factor behind 
the performance of the Swedish economy.
The autoregressive distributed lag approach (ARDL) 
which is also used in this paper has been already applied 
to modeling fiscal policy actions. Among others, Alexiou 
and Nellis (2017) found that the size of the fiscal multi-
plier does not differ substantially over the phases of the 
business cycle and that government consumption has a 
positive effect on economic growth, regardless of infla-
tion rates. On the other hand, there was a lack of evidence 
that low-interest rates significantly determine the rela-
tionship between government consumption and output. 
It is important to note that the study takes into account 
only the Greek economy. Furthermore, Sharma and Mittal 
(2019) provide some evidence about the presence of an 
asymmetric connection between fiscal deficit and GDP 
in the short and long run based on the nonlinear ARDL 
model for India where, according to their findings, fiscal 
deficit harms GDP. Asandului et al. (2020) estimate on a 
sample of twelve post-communist economies and asym-
metric ARDL approach that cumulative impact of fiscal 
policy generates inflationary output effect for countries 
in their sample.
As was shown in this chapter, many new papers have 
recently emerged in the field of studying and analyzing 
the transmission mechanism of fiscal policy, addressing 
various aspects of the effectiveness of fiscal stimuli in 
promoting economic growth. Although consensus is grad-
ually being made, there are still different interpretations 
of the impact of some individual structural and dynamic 
factors on the size of fiscal multipliers. As a result, the 
transmission mechanism of fiscal policy has been only par-
tially explained so far. For that reason, our study focuses 
on identifying the possible presence of asymmetric pro-
cesses in the relationship between government spending 
and economic activity in a special sample of five Nordic 
countries, all of which record a relatively high share of 
government spending in GDP.
Methodology
For estimating the relationship between government con-
sumption and economic activity, we initially use the linear 
autoregressive distributed lag model following Pesaran et 
al. (2001) and then, the upgraded nonlinear autoregressive 
distributed lag model introduced by Shin et al. (2014). The 
aforementioned methodological technique was applied in 
Senekovič (2021) by assessing the fiscal policy actions of 
the world’s largest developed economies. However, it is 
also utilized in various research areas of macroeconom-
ics, such as testing for purchasing power parity (see, for 
example, Arize and Bahmani oskooee (2021)) or analyzing 
the role of the tourism sector in aggregate output (see, for 
example, Husein and Kara (2020)).
The relationship between government consumption and 
economic activity is first estimated via the autoregressive 
distributed lag model following Pesaran et al. (2001) which 
is noted as a linear or symmetric ARDL model from here 
on. The model is presented in equation 1.
  logY yl ogY G
Y
ti
i
n
tt i
i
n
ti
t
 







 

01
1
12
0
31
12
log
log  


41
logG
tt
(1)
Where the coefficients α
2i
 represent short-run effects of 
government consumption (measured in first differences) on 
economic activity and the coefficient α
4
 represents long-run 
effect estimated based on the lagged variable of government 
consumption. Notations are as follows. G stands for gov-
ernment consumption and Y stands for aggregate output.

5
Marko Senekovič: What is the Nature of the Dynamics between Government Spending and Aggregate Output in the Nordic Countries?
Shin et al. (2014) upgrade the linear ARDL model by intro-
ducing some nonlinearities into it. To detect asymmetries 
in the relationship between independent and dependent 
variables Shin et al. (2014) decompose fluctuations in the 
independent variable, in our case in government consump-
tion, into its positive and negative partial sums, which is 
represented in equation 2 and equation 3.
logG logG maxl ogG
tj
j
t
i
t
j





01
0
()
, (2)
logG logG minl ogG
tj
j
t
i
t
j





01
0
()
, (3)
Then Shin et al. (2014) develop a nonlinear model by re-
placing independent variables, in our case government con-
sumption, with partial sum components defined in equations 
1 and 2. The nonlinear (asymmetric) ARDL approach is then 
defined in equation 4 as follows.
  logY yl ogY logG
ti
i
n
tt i
i
n
ti
i
i
n
 









 

01
1
12
0
3
0
12
3
 logG logY logG logG
ti tttt 





 
41 51 61
(4)
Where coefficients β
2i
 represent the short-run effect of gov-
ernment spending on economic activity in case of positive 
dynamics of government consumption, and coefficients β
3i
 
represent the effect of government spending on economic 
activity in case of negative dynamics in government 
consumption. The long-run output effect of government 
spending for the case of positive and negative dynamics in 
government spending is represented by the coefficients β
5
 
and β
6
, respectively.
Data Properties
For the present study, we use a quarterly dataset for five 
Nordic countries, namely Denmark, Finland, Iceland, 
Norway, and Sweden. For all five countries, data were 
retrieved from the International Monetary Fund (2021). 
In pursuit of estimating the relationship between govern-
ment consumption and economic activity with focusing 
on detecting potential asymmetries among those two var-
iables, we use GDP and government final consumption 
expenditures as it is defined in the expenditure structure of 
the GDP as proxy variables. Time series for each country 
cover timespan from 1995Q1 to 2020Q4 which comprises 
104 data points per country. For each of the five countries, 
government consumption and GDP data were obtained in 
constant national currency units in absolute terms, where-
with the exception of Iceland, variables were also season-
ally adjusted by the database. Finally, we transform real 
government consumption and real GDP variables into a 
logarithmic form.
Compared to other developed countries, the role of the 
state has been traditionally emphasized in the economies 
of the Nordic countries. Thus, unlike Anglo-Saxon as well 
as continental capitalism, Nordic capitalism is even more 
socially oriented in terms of providing a relatively denser 
social network that helps members of society overcome 
obstacles when their existence is threatened. As a result, 
the Nordic countries recorded a higher share of govern-
ment expenditure in GDP, which was around or slightly 
above 25% for all countries in 2020, with Iceland having 
the highest share of 27.8% and Finland the lowest share of 
government consumption in GDP with 24.4%. For com-
parison, we cite the share of government consumption in 
Germany, which is considered the benchmark of continen-
tal Europe, and the European Union average. In the case of 
the former, the share is 22.4%, and in the case of the latter 
22.7%. On the other hand, the average share of govern-
ment consumption in GDP for OECD countries amounts to 
18.8% (World Bank, 2021).
Interpretation of Results
In this chapter, we present the estimates for each country 
separately, for both the symmetric (linear) and asymmetric 
(nonlinear) models. In the case of the asymmetric model, 
the results are also shown in a graphical form where a 
short-dashed line represents the output response in the case 
of a positive change in real government spending while a 
long-dashed line indicates the response of real output in 
the case of negative change in real government consump-
tion. The solid line represents the perceived asymmetry. 
The shaded area represents the 90% confidence interval in 
detecting output response asymmetry between the afore-
mentioned two scenarios. Graphical representations of the 
results of the nonlinear model are plotted on a 20 quarters 
horizon. The results are presented in alphabetical order of 
the included countries.
In the case of Denmark (Table 1), the results of the linear 
model show a positive statistical link between the dynamics 
of government consumption and the dynamics of aggregate 
output with the coefficient being statistically significant in 
both the short and long term. The magnitude of the output 
effect of government consumption is stronger in the long 

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NAŠE GOSPODARSTVO / OUR ECONOMY Vol. 68 No. 1 / March 2022
run. In the asymmetric model, in the short run, a positive 
output response is estimated in periods when government 
consumption increases and negative output response in 
periods when government consumption decreases. Con-
versely, in the long run, in both cases, a positive output 
response was observed, regardless of the dynamics of gov-
ernment consumption. In the nonlinear model, estimated 
coefficients are statistically significant only when govern-
ment consumption decreases. The analysis of the output 
response through the prism of detecting asymmetry is of 
interest where statistically significant both short-term and 
long-term asymmetries are found (Figure 1). In the short 
term, we observe a negatively inclined asymmetry, which 
means that under negative dynamics in government con-
sumption, the output response is stronger in its magnitude. 
On the other hand, in the long run, however, this output 
response goes into positive territory.
Table 1. Denmark results
Linear (symmetric) ARDL model
Coefficient Estimates t-statistic Prob. level
Constant α
0
0.216 1.26 0.210
Short-run α
2
0.597 3.77 0.000
Long-run α
4
0.807 4.23 0.000
Nonlinear (asymmetric) ARDL model
Coefficient Estimates t-statistic Prob. level
Constant β
0
1.495 3.08 0.003
Short-run positive β
2
0.016 0.50 0.621
Short-run negative β
3
-0.204 -2.63 0.010
Long-run positive β
5
0.135 0.31 0.582
Long-run negative β
6
1.764 4.39 0.039
Asymmetry testing
F-statistic Prob. level
Short-run asymmetry 6.838 0.010
Long-run asymmetry 9.680 0.003
Figure 1. Asymmetry testing for Denmark Figure 2. Asymmetry testing for Finland

7
Marko Senekovič: What is the Nature of the Dynamics between Government Spending and Aggregate Output in the Nordic Countries?
Table 2. Finland - results
Linear (symmetric) ARDL model
Coefficient Estimates t-statistic Prob. level
Constant α
0
0.026 0.13 0.896
Short-run α
2
0.096 1.76 0.082
Long-run α
4
1.123 4.30 0.000
Nonlinear (asymmetric) ARDL model
Coefficient Estimates t-statistic Prob. level
Constant β
0
0.776 1.73 0.087
Short-run positive β
2
0.106 0.97 0.334
Short-run negative β
3
-0.138 0.86 0.392
Long-run positive β
5
1.431 3.14 0.080
Long-run negative β
6
-1.871 1.682 0.198
Asymmetry testing
F-statistic Prob. level
Short-run asymmetry 0.561 0.456
Long-run asymmetry 0.418 0.520
In the symmetric model for Iceland, we estimate a positive 
relationship between government consumption and 
economic activity. On the other hand, however, the statis-
tical significance of both coefficients, short-term and long-
term, is on the verge of admissibility (Table 3). Neverthe-
less, the long-term effect, which is otherwise more intense 
in magnitude, can still be characterized as statistically 
significant. Conversely, in the asymmetric model, all esti-
mated coefficients are statistically significant, and the signs 
of the coefficients are also in line with the expectations 
of economic theory. In contrast to the results for Denmark 
and Finland, in the case of Iceland, a stronger short- and 
long-term output response is observed under the scenario 
where government consumption increases. Test statistics 
confirm the presence of an asymmetric long-term effect 
of government consumption on output, namely, asymme-
try is slightly inclined in favor of a positive scenario. In 
addition to this, Figure 3 shows a slightly stronger short-
run response of output in the case of negative dynamics 
of government consumption. This short-run asymmetry, 
however, is not supported by statistical criteria.
The results for Norway are mixed and a bit contradicto-
ry compared to results for other Nordic countries. Even 
though the linear model provides positive short-run and 
long-run estimates which are also statistically signifi-
cant, which confirms an established positive relationship 
between dynamic activity in government consumption and 
Table 2 presents the results for Finland where a positive re-
lationship between government consumption and economic 
activity is estimated within a linear model, which is in line 
with assumptions of economic theory. Both coefficients, 
short-term and long-term, are statistically significant, with 
the long-term effect on the output being stronger. In the 
nonlinear model, the estimated coefficients – except for the 
output response in periods of positive dynamics in govern-
ment consumption – do not meet the criteria for achiev-
ing statistical standards for significance. Nevertheless, in 
line with economic theory predictions, a positive output 
response is recorded when government consumption in-
creases and a negative output response when government 
consumption decreases. In terms of magnitude, a stronger 
long-term effect of government consumption on output is 
again perceived, in both scenarios, in the case of negative 
and positive dynamics of government consumption. From 
Figure 2, one can observe a relatively symmetrical response 
of output. Thus, it is not surprising that even through test 
statistics, we reject the assumption of the presence of an 
asymmetric response of output to changes in government 
consumption. Nevertheless, only based on graphical 
analysis and beyond statistical standards, we can only 
speculate that for Finland the output response is slightly 
stronger under positive dynamics in government spending 
in the short term, while in the long run, the output response 
is slightly more intense in the case of negative dynamics in 
government spending.

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NAŠE GOSPODARSTVO / OUR ECONOMY Vol. 68 No. 1 / March 2022
economic activity, the results from the nonlinear model 
do not corroborate these findings (Table 4). A mere look 
at Figure 4 reveals the unusual response of output to the 
initial dynamics in government consumption. Thus, in the 
case of an increase in government consumption, output 
initially reacts positively. After the first quarter, however, 
it slips into the negative zone and then continues in the 
positive zone after the fifth quarter. At the same time, 
neither the short-term nor the long-term coefficient is sta-
tistically significantly different from zero. In the scenario 
Table 3. Iceland - results
Linear (symmetric) ARDL model
Coefficient Estimates t-statistic Prob. level
Constant α
0
0.760 2.75 0.007
Short-run α
2
0.163 1.64 0.105
Long-run α
4
2.461 1.72 0.089
Nonlinear (asymmetric) ARDL model
Coefficient Estimates t-statistic Prob. level
Constant β
0
5.582 4.20 0.000
Short-run positive β
2
0.390 3.60 0.001
Short-run negative β
3
-0.295 3.03 0.003
Long-run positive β
5
0.871 83.0 0.000
Long-run negative β
6
-0.658 26.6 0.000
Asymmetry testing
F-statistic Prob. level
Short-run asymmetry 0.694 0.407
Long-run asymmetry 30.38 0.000
Table 4. Norway – results
Linear (symmetric) ARDL model
Coefficient Estimates t-statistic Prob. level
Constant α
0
0.688 2.92 0.004
Short-run α
2
0.319 3.18 0.002
Long-run α
4
0.633 5.68 0.000
Nonlinear (asymmetric) ARDL model
Coefficient Estimates t-statistic Prob. level
Constant β
0
2.171 2.30 0.024
Short-run positive β
2
-0.068 -0.41 0.686
Short-run negative β
3
0.085 2.39 0.004
Long-run positive β
5
0.390 2.32 0.132
Long-run negative β
6
0.413 0.18 0.673
Asymmetry testing
F-statistic Prob. level
Short-run asymmetry 0.018 0.891
Long-run asymmetry 1.209 0.275

9
Marko Senekovič: What is the Nature of the Dynamics between Government Spending and Aggregate Output in the Nordic Countries?
of negative dynamics of government consumption, the 
output response is even more unusual. Thus, at first, the 
reaction of the output is slightly negative. Already in the 
first quarter, however, it turns into a positive area and 
persists in it over the entire forecast horizon. In terms of 
magnitude, the response of output is even stronger in the 
case of negative dynamics of government consumption, as 
shown by both the estimated coefficients in Table 4 and the 
dynamic of output response in Figure 4.
In the case of Sweden (Table 5), based on a linear model, 
we estimate a positive relationship between the dynamics 
of government consumption and the movement of GDP, 
which is also statistically significant both in the short 
and long term. On the other hand, the nonlinear model 
produces statistically significant estimates of the coef-
ficients that also follow economic theory in signs. Only 
long-term asymmetry is identified through statistical 
standards. However, the detection of statistically signifi-
cant short-term asymmetry slightly misses the limit value. 
Figure 5 depicts negatively inclined short-term asymmetry 
and positively inclined long-term asymmetry. In addition 
to this, based on graphical analysis, we find that the long-
term asymmetry in the output response is milder compared 
to the short-term period.
Figure 3. Asymmetry testing for Iceland Figure 4. Asymmetry testing for Norway
Table 5. Sweden – results
Linear (symmetric) ARDL model
Coefficient Estimates t-statistic Prob. level
Constant α
0
0.383 1.85 0.068
Short-run α
2
1.968 13.2 0.000
Long-run α
4
0.805 5.58 0.000
Nonlinear (asymmetric) ARDL model
Coefficient Estimates t-statistic Prob. level
Constant β
0
1.759 3.22 0.002
Short-run positive β
2
0.123 2.77 0.007
Short-run negative β
3
-0.059 1.71 0.090
Long-run positive β
5
0.734 47.9 0.000
Long-run negative β
6
-0.352 5.17 0.026
Asymmetry testing
F-statistic Prob. level
Short-run asymmetry 2.011 0.160
Long-run asymmetry 10.47 0.002

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NAŠE GOSPODARSTVO / OUR ECONOMY Vol. 68 No. 1 / March 2022
Bottom line, the results in the case of empirical analysis 
of the relationship between government consumption and 
economic activity in the Nordic sample and by applying a 
linear model show the existence of a positive relationship 
between government consumption and output dynamics in 
both short and long term. A statistically significant positive 
short-term relationship was found in four out of five cases 
while a statistically significant positive long-term relation-
ship was estimated for all countries included in our sample.
On the other hand, the results of the nonlinear model are 
somewhat less unambiguous. First, six coefficients out of 
ten are assessed as statistically significant in the short-term 
analysis of the output effect of government consumption. 
Second, six coefficients out of ten are estimated as statis-
tically significant in the analysis of the long-term impact 
of government consumption on economic activity. Third, 
signs of estimated coefficients are in line with economic 
theory, except for Norway where estimates suggest a 
different interpretation, and Denmark in the scenario of 
negative dynamics of government consumption and as-
sessment of long-term impact. And finally, statistically 
significant asymmetry is detected in four out of ten cases 
considering both short- and long-run asymmetry for five 
sample countries. Nevertheless, the results regarding the 
perception of the asymmetry in the output response to the 
initial change in government consumption need further 
clarification.
The graphical analysis alone reveals a slightly more 
complete picture with an asymmetric short-term output 
response observed in three out of five cases. If we exclude 
results for Norway, for which estimates are relatively 
atypical, and Finland, for which we found rather sym-
metric output response, in the case of Denmark, Sweden, 
and conditionally Iceland, however, we can safely speak 
of detected negatively inclined short-run asymmetry. As 
regards the graphical analysis of the long-term effect of 
government consumption on economic activity, asymmetry 
can be detected when Norway is excluded due to atypical 
results and Finland due to a relatively symmetrical output 
response. This is especially evident in the case of Sweden 
and Iceland, which is also confirmed by test statistics while 
in the case of Denmark there is a statistically significant 
long-run asymmetry. However, the interpretation of the 
Danish output response is a bit contrary to conventional 
economic wisdom.
Our results are partially comparable with the results 
of studies that estimate the size of fiscal multipliers de-
pending on the business cycle phase, with most of these 
studies finding higher multipliers during recession periods. 
Assuming that the negative dynamics in government con-
sumption coincides with recessionary periods, in the cases 
of Sweden, Denmark, and partly Iceland where negatively 
inclined short-run asymmetry is detected, our results are 
in line with, for example, Auerbach and Gorodnichenko 
(2010, 2011, 2014), Batini et al. (2014), and Koh (2017) 
who all assessed larger fiscal multipliers in times of reces-
sion. It is also interesting that our results which are indeed 
estimated based on a more recent data sample show a neg-
atively inclined short-term asymmetry in the Swedish case 
which is not consistent with Hatemi's (2014) estimates.
Although the results for the sample of the five Nordic coun-
tries do not offer a completely clear interpretation, we can, 
nevertheless, at least partially support the assumption that 
the dynamics in government consumption have a stronger 
effect on output during periods of declining government 
consumption. As a result, the application of austerity 
measures during recessionary periods works counterpro-
ductive, because spending cuts deepen fiscal deficit instead 
of improving the country's fiscal position.
Conclusion
Explaining the transmission mechanism of fiscal policy in 
stabilizing the business cycle has gained importance over the 
last decade. Several issues have arisen addressing differences 
in the effectiveness of fiscal stimuli in boosting economic 
growth. According to the recent empirical literature, the het-
erogeneity in the impact of fiscal stimuli could be explained 
mainly due to structural differences among individual econ-
omies, e.g. trade or capital openness, the level of public 
or private indebtedness, but also due to cyclical and, thus, 
non-linear processes in business cycle dynamics. The change 
in the research focus and the shift to the fiscal field coincides 
with the development of the economic reality after the Great 
Recession, which is marked by the relatively exhausted 
Figure 5. Asymmetry testing for Sweden

11
Marko Senekovič: What is the Nature of the Dynamics between Government Spending and Aggregate Output in the Nordic Countries?
potential of the monetary authorities and lower average rates 
of economic growth.
In this paper, we focus on testing the presence of nonlinear 
or asymmetric processes in the relationship between govern-
ment consumption and economic activity. Using a nonlin-
ear ARDL model based on the quarterly sample of the five 
Nordic countries, we check for the presence of short-term and 
long-term asymmetry in the response of output to the initial 
positive or negative dynamics in government spending.
The main findings of our research are the following. Based 
on the linear model, a positive link between government con-
sumption and economic activity has been confirmed, both in 
the short and long term, which is in line with the predictions 
of economic theory. Based on the nonlinear model, six out of 
ten short-term coefficients are statistically significant as are 
six out of ten long-term coefficients, with results for Norway 
not offering the possibility of a clear economic interpretation. 
Thus, based on estimated test statistics and graphical analysis, 
we can conclude on the presence of short-term or long-term 
asymmetry in three of the remaining four countries, as in the 
Finnish case the output response in both scenarios turned out 
to be relatively symmetric. Nevertheless, the results suggest 
the presence of a negatively inclined asymmetry in the re-
lationship between government consumption and economic 
activity with stronger output response in periods when 
government consumption decreases. The results, therefore, 
support the notion that the reduction of fiscal spending in 
recessionary periods induces a stronger output response and, 
consequently, further decline of economic activity, which 
in turn leads to additional fall of aggregate tax revenue and 
further deterioration of fiscal balance.
Future research should be focused on expanding the sample 
countries, especially in terms of differentiation of the coun-
tries according to their structural and dynamic characteris-
tics, which can, in fact, contribute to a better understanding 
of the capabilities of fiscal policy to effectively counteract 
business cycle deviations. Additional research effort should 
also be directed to expand the basic model with additional 
variables, which would allow even more detailed analysis 
and understanding of the specifics of the fiscal policy trans-
mission mechanism.
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Marko Senekovič: What is the Nature of the Dynamics between Government Spending and Aggregate Output in the Nordic Countries?
Kakšna je narava dinamike med državno potrošnjo 
in agregatnim outputom v nordijskih državah?
Izvleček
Glavni namen tega članka je analiza razmerja med državno potrošnjo in agregatnim outputom v petih nordijskih državah v 
primeru dveh različnih scenarijev: prvič, v obdobjih, ko se državna potrošnja povečuje, in drugič, v obdobjih, ko se državna 
potrošnja zmanjšuje. Za testiranje prisotnosti kratkoročne in dolgoročne asimetrije pri odzivu outputa na državno potrošnjo 
uporabimo nelinearni ARDL model. Ključne ugotovitve so naslednje. Prvič, na podlagi linearnega modela je bila potrjena 
pozitivna povezava med državno potrošnjo in ekonomsko aktivnostjo tako na kratek kot na dolgi rok, kar je tudi v skladu z 
napovedmi ekonomske teorije. Drugič, na podlagi nelinearnega modela je šest od desetih kratkoročnih koeficientov ocenjenih 
za statistično značilne, prav tako šest od desetih dolgoročnih koeficientov, pri čemer je statistično značilna asimetrija odkrita 
v štirih od desetih primerov. Ocenjena testna statistika skupaj z grafično analizo tako kaže na prisotnost negativno nagnjene 
asimetrije v razmerju med državno potrošnjo in dinamiko agregatnega outputa z močnejšim odzivom outputa v obdobjih, ko 
se državna potrošnja zmanjšuje.
Ključne besede: fiskalna politika, nordijske države, nelinearni ARDL model