Estimating the effects of fiscal policy in OECD countries

This paper studies the effects of fiscal policy on GDP, inflation and interest rates
in 5 OECD countries, using a structural Vector Autoregression approach. Its main
results can be summarized as follows: 1) The effects of fiscal policy on GDP tend
to be small: government spending multipliers larger than 1 can be estimated only
in the US in the pre-1980 period. 2) There is no evidence that tax cuts work faster
or more effectively than spending increases. 3) The effects of government spending
shocks and tax cuts on GDP and its components have become substantially weaker
over time; in the post-1980 period these effects are mostly negative, particularly on
private investment. 4) Only in the post-1980 period is there evidence of positive
effects of government spending on long interest rates. In fact, when the real interest
rate is held constant in the impulse responses, much of the decline in the response
of GDP in the post-1980 period in the US and UK disappears. 5) Under plausible
values of its price elasticity, government spending typically has small effects on
inflation. 6) Both the decline in the variance of the fiscal shocks and the change
in their transmission mechanism contribute to the decline in the variance of GDP
after 1980.