Does Fiscal Policy Affect Private Sector Output? A VAR Analysis

44 Pages Posted: 4 Oct 2009 Last revised: 28 Jan 2010

Jun Ma

University of Alabama - Department of Economics, Finance and Legal Studies

James Peery Cover

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: October 3, 2009

Abstract

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

Ma, Jun and Cover, James Peery, Does Fiscal Policy Affect Private Sector Output? A VAR Analysis (October 3, 2009). Available at SSRN: https://ssrn.com/abstract=1482384 or http://dx.doi.org/10.2139/ssrn.1482384

Jun Ma

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States

James Peery Cover (Contact Author)

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL 35487
United States
205-348-8977 (Phone)
205-348-0590 (Fax)

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