Fiscal Policy, Profits, and Investment

Alberto Alesina, Silvia Ardagna, Roberto Perotti, Fabio Schiantarelli

NBER Working Paper No. 7207
Issued in July 1999
NBER Program(s):   ME   PE

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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Published: Alesina, Alberto, Silva Ardagna, Roberto Perotti and Fabio Schiantarelli. "Fiscal Policy, Profits, And Investment," American Economic Review, 2002, v92(3,Jun), 571-589.

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