Working Paper: CEPR ID: DP2250
Authors: Alberto Alesina; Roberto Perotti; Fabio Schiantarelli; Silvia Ardagna
Abstract: 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 sizeable 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.
Keywords: fiscal policy; investment; profits; taxes
JEL Codes: E62; H32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Reductions in public spending (H69) | Increases in profits (D33) |
| Increases in profits (D33) | Increases in investment (E22) |
| Reductions in public spending (H69) | Increases in investment (E22) |
| Cuts in government wages (J45) | Increases in investment (E22) |
| Increases in taxes (H29) | Reductions in profits (D33) |
| Reductions in profits (D33) | Reductions in investment (G31) |
| Increases in taxes (H29) | Reductions in investment (G31) |