This research carries out a statistical and econometric analysis to assess the effects of increased public spending on economic activity during the coronavirus disease (COVID-19) pandemic in Central American countries and the Dominican Republic, in the period 2020-2022. Among the main conclusions, it is worth mentioning that the countries that had higher public spending between 2020 and 2021 also experienced a significant economic recovery in 2021. Likewise, these countries have a higher multiplier of public spending in relation to gross domestic product (GDP). Vector autoregressive models and the analysis of impulse-response functions confirm that the effects of the countercyclical fiscal measures that were implemented during the pandemic in the economies of Central America and the Dominican Republic are differentiated and persistent.
These measures had an impact in the short, medium and long term, as both positive and negative effects dissipated after three or four years and indicators returned to their usual levels in the fourth or fifth year. Furthermore, based on the estimation of models using the generalized method of moments (GMM), it was shown that the implementation of a countercyclical fiscal policy during the pandemic had a positive effect on GDP in the short term in all countries, although to a different extent. The panel model for the set of countries studied also confirmed that the higher fiscal deficit in that period had a positive impact on GDP. Therefore, fiscal policy played a central role in mitigating the economic repercussions of the COVID-19 pandemic and, at the same time, provided part of the necessary impetus to achieve the reactivation of economic activity in the Central American countries and in the Dominican Republic.
