DP2250 Fiscal Policy, Profits and Investment

Author(s): Alberto F. Alesina , Silvia Ardagna , Roberto Perotti , Fabio Schiantarelli

Publication Date: October 1999

Keyword(s): Fiscal Policy , Investment , Profits , Taxes

JEL(s): E62 , H32

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP2250.asp

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.