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Fiscal Policy, Profits, and Investment

  • Alberto Alesina

    (Harvard University)

  • Silvia Ardagna

    (Wellesley College)

  • Roberto Perotti

    (European University Institute)

  • Fabio Schiantarelli

    ()

    (Boston College)

This paper evaluates the effects of fiscal policy on investment using a panel of OECD countries. In particular, we investigate how different types of fiscal policy affect profits and , as a result, investment. We find a sizable negative effect of public spending -- and in particular of its public wage component -- on business investment. This result is consistent with models in which government employment creates wage pressure for the private sector. Various types of taxes also have negative effects on profits, but, interestingly, the effects of government spending on investment are larger than the effect of taxes. Our results have important implications for the so called 'Non-Keynesian' (i.e. expansionary) effects of fiscal adjustments.

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Paper provided by Boston College Department of Economics in its series Boston College Working Papers in Economics with number 504.

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Length: 52 pages
Date of creation: 31 Jul 2000
Date of revision:
Publication status: published, American Economic Review, 2002, 92:571-589
Handle: RePEc:boc:bocoec:504
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