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Estimating the Effects of Fiscal Policy in OECD Countries

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  • Perotti, Roberto

Abstract

This Paper studies the effects of fiscal policy on GDP, inflation and interest rates in five OECD countries, using a structural Vector Autoregression approach. Its main results can be summarized as follows: 1) The effects of fiscal policy on GDP tend to be small: government spending multipliers larger than 1 can be estimated only in the US in the pre-1980 period. 2) There is no evidence that tax cuts work faster or more effectively than spending increases. 3) The effects of government spending shocks and tax cuts on GDP and its components have become substantially weaker over time; in the post-1980 period these effects are mostly negative, particularly on private investment. 4) Only in the post-1980 period is there evidence of positive effects of government spending on long interest rates. In fact, when the real interest rate is held constant in the impulse responses, much of the decline in the response of GDP in the post-1980 period in the US and UK disappears. 5) Under plausible values of its price elasticity, government spending typically has small effects on inflation. 6) Both the decline in the variance of the fiscal shocks and the change in their transmission mechanism contribute to the decline in the variance of GDP after 1980.

Suggested Citation

  • Perotti, Roberto, 2005. "Estimating the Effects of Fiscal Policy in OECD Countries," CEPR Discussion Papers 4842, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:4842
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    References listed on IDEAS

    as
    1. Keith B. Church & Joanne E. Sault & Silvia Sgherri & Kenneth F. Wallis, 2000. "Comparative Properties of Models of the UK Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 171(1), pages 106-122, January.
    2. Keith B. Church & Joanne E. Sault & Silvia Sgherri & Kenneth F. Wallis, 2000. "Comparative Properties of Models of the UK Economy," National Institute Economic Review, National Institute of Economic and Social Research, vol. 171(1), pages 106-122, January.
    3. repec:sae:niesru:v:129:y::i:1:p:69-87 is not listed on IDEAS
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    More about this item

    Keywords

    fiscal policy; Government Spending; taxes;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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