Economic activity, fiscal, and capital flow dynamics in Bulgaria 2007-2012: fiscal multiplier theory vs. “other things”

When towards the end of 2008 the leading world economies found themselves in the grips of a severe global financial and economic crisis, their governments felt compelled to react. Most of them, especially in North America and Europe, did so by dramatic increases in government spending with two main goals: to bail our failing financial systems and to substitute dropping private demand with pumped-up public demand as a general support for the aggregate. At the same time central banks made large injections of liquidity to pump up the monetary base and thus counteract the severely contracting money multipliers – at the cost of putting on their balances assets of less than prime quality and thus in effect debasing the currencies of the respective economies.