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The transmission mechanism of fiscal policy: a critical assessment of current theories and empirical methodologies

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  • Giuseppe Fontana

Abstract

This paper reviews the current theoretical and empirical literature on the transmission mechanisms of fiscal policy. Its main conclusion is that there is nothing closely approaching an agreement on the effects of fiscal policy. The theoretical and empirical literature on the subject is scarce and divisive. The predictions of the neoclassical theory and the new Keynesian theory, as well as the "narrative" or "dummy variable" and the "structural vector autoregression" (SVAR) types of empirical analyses of fiscal policy all rest on shaky foundationsânamely, the intertemporal government budget constraint, the Ricardian equivalence hypothesis, and severe empirical restrictions in order to identify fiscal shocks.

Suggested Citation

  • Giuseppe Fontana, 2009. "The transmission mechanism of fiscal policy: a critical assessment of current theories and empirical methodologies," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 31(4), pages 587-604, July.
  • Handle: RePEc:mes:postke:v:31:y:2009:i:4:p:587-604
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    Citations

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    Cited by:

    1. Hernán Rincón & Diego Rodríguez & Jorge Toro & Santiago Téllez, 2017. "FISCO: modelo fiscal para Colombia," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República - ESPE, vol. 35(83), pages 161-187, June.
    2. Bernd Hayo & Matthias Uhl, 2015. "Regional effects of federal tax shocks," Southern Economic Journal, Southern Economic Association, vol. 82(2), pages 343-360, October.
    3. Ricardo Silva & Vitor Manuel Carvalho & Ana Paula Ribeiro, 2013. "How large are fiscal multipliers? A panel-data VAR approach for the Euro area," FEP Working Papers 500, Universidade do Porto, Faculdade de Economia do Porto.
    4. Bernd Hayo & Matthias Uhl, 2011. "The Effects of Legislated Tax Changes in Germany," MAGKS Papers on Economics 201142, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    5. Hayo, Bernd & Uhl, Matthias, 2015. "Taxation and labour supply: Evidence from a representative population survey," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 336-346.
    6. Giuseppe Fontana & Malcolm Sawyer, 2011. "Fiscal Austerity," Challenge, Taylor & Francis Journals, vol. 54(2), pages 42-60.
    7. Nicola Acocella, "undated". "A tale of two cities: exit policies in Washington and Frankfurt," Working Papers 117/13, Sapienza University of Rome, Metodi e Modelli per l'Economia, il Territorio e la Finanza MEMOTEF.

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