Does Fiscal Policy Affect Private Sector Output? A VAR Analysis
44 Pages Posted: 4 Oct 2009 Last revised: 28 Jan 2010
Date Written: October 3, 2009
This paper employs tests for Granger-Sims causality and a four-variable vector-autoregression (VAR) to examine whether real government spending and real net taxes have any systematic effect on output purchased by the private sector. The paper finds no evidence of causality from government spending to private sector output, and very little evidence of causality from net taxes to private sector output. The VAR analysis implies that, at best, increases in government spending have no multiplier effect on private sector output, or, at worst, cause private sector output to decline by an equal amount. The VAR analysis implies that changes in taxes either have no effect on output or affect output with a delay too long to make tax changes a useful tool for short-run stabilization policy.
Keywords: Fiscal Policy, government spending, taxes, real output
JEL Classification: E62
Suggested Citation: Suggested Citation