Short Run Effects of Fiscal Policy on GDP and Employment: Swedish Evidence

Since the financial crisis, there has been a surge in theoretical and empirical studies on the macroeconomic effects of fiscal policy. Moreover, the protracted state of low demand since 2008 together with constrained monetary policy have put emphasis on non-linear effects of fiscal policy. In this paper, we use a newly published quarterly Swedish data set on fiscal variables and estimate the effects on GDP and employment for the period 1980q1–2015q3. We examine the linear and non-linear short run effects of shocks to government consumption, investments, transfers to households, indirect taxes on consumption goods and direct taxes on household income. We find that fiscal policy generally has Keynesian effects although often insignificant. The multipliers are on average greater when estimated during the period of flexible exchange rate, 1993q1–2015q3. Shocks to government investments were found to have the greatest effect on both GDP and employment. Looking at non-linear effects it was interestingly found that all three fiscal spending variables have rather substantial positive effects on employment in slumps while the employment effects of shocks to taxes are small indeed. However, the non-linear results are sensitive both to the instrument used and the definition of “slump”.