Fiscal Policy, Profits, and Investment

52 Pages Posted: 7 Aug 2012 Last revised: 13 Mar 2022

See all articles by Alberto F. Alesina

Alberto F. Alesina

Harvard University - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Silvia Ardagna

National Bureau of Economic Research (NBER); Goldman Sachs - London

Roberto Perotti

Bocconi University - Department of Economics; European University Institute - Economics Department (ECO); Centre for Economic Policy Research (CEPR)

Fabio Schiantarelli

Boston College - Department of Economics; IZA Institute of Labor Economics

Date Written: July 1999

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 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.

Suggested Citation

Alesina, Alberto F. and Ardagna, Silvia and Perotti, Roberto and Schiantarelli, Fabio, Fiscal Policy, Profits, and Investment (July 1999). NBER Working Paper No. w7207, Available at SSRN: https://ssrn.com/abstract=203128

Alberto F. Alesina (Contact Author)

Harvard University - Department of Economics ( email )

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Silvia Ardagna

National Bureau of Economic Research (NBER) ( email )

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Bocconi University - Department of Economics ( email )

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Fabio Schiantarelli

Boston College - Department of Economics ( email )

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