How important is fiscal stimulus for economic growth? Empirical evidence from G7 countries

This paper contributes to the existing discussion on the quantitative power of fiscal stimulus in the creation of economic growth in two ways. Firstly, by applying structural vector autoregression, our study focuses on assessing the size of the fiscal multipliers in the group of G7 countries. Secondly, using a new dataset for all seven countries in the sample, our study updates the existing empirical record of the extent of fiscal effects on the economic activity. The results indicate empirical relevance of the mechanism of the fiscal multiplier even though estimated values of the fiscal multipliers do not exceed unity in all cases. One-time positive shock in government consumption affects the aggregate output to a greater extent than domestic price level and interest rates. Our findings suggest a non-negligible capacity of the stimulation-designed budgetary policy in the economically strongest countries to boost short-term economic growth.