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Fiscal Policy Effects on Economic Growth: Short Run vs Long Run


  • Kalle Kukk

    () (Department of Economics, Tallinn University of Technology)


There are two important aspects to take into account while analysing fiscal policy effects on economic growth. First, it should be made clear whether Keynesian short-run or classical long-run effects are the object of interest. Second, the relations between different fiscal and macroeconomic variables should be identified ñ all possible simultaneous changes in other fiscal and macroeconomic indicators should be taken account of while analysing the effect of any fiscal policy decision on economic growth. As demonstrated in this article, Keynesian principles do not seem to hold as fiscal policy cannot have any remarkable impact on economy in a short run. But it is confirmed that in the long run, expansionary fiscal policies are not beneficial to the economy generally. For a government it is essential to recognise that changes in different revenue and expenditure categories may have the same impact on budget balance and on total government revenue and expenditure but they have different effects on economic growth in the long run. For example, fiscal policy decisions have different effects depending on whether to save increased revenue, to spend it for current expenditure or to use it for public investment.

Suggested Citation

  • Kalle Kukk, 2007. "Fiscal Policy Effects on Economic Growth: Short Run vs Long Run," Working Papers 167, Tallinn School of Economics and Business Administration, Tallinn University of Technology.
  • Handle: RePEc:ttu:wpaper:167

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    References listed on IDEAS

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    More about this item


    fiscal policy; economic growth; budget deficit; government revenue; government expenditure; taxes;

    JEL classification:

    • H1 - Public Economics - - Structure and Scope of Government
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H6 - Public Economics - - National Budget, Deficit, and Debt
    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity

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