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American Economic Review: Vol. 92 No. 3 (June 2002)

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Fiscal Policy, Profits, and Investment

Article Citation

Alesina, Alberto, Silvia Ardagna, Roberto Perotti, and Fabio Schiantarelli. 2002. "Fiscal Policy, Profits, and Investment ." American Economic Review, 92(3): 571-589.

DOI: 10.1257/00028280260136255

Abstract

This paper evaluates the effects of fiscal policy on investment using a panel of OECD countries. We find a sizeable negative effect of public spending—and in particular of its wage component—on profits and on business investment. This result is consistent with different theoretical 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 those of taxes. Our results can explain the so-called "non-Keynesian" (i.e., expansionary) effects of fiscal adjustments. (JEL E22, E62)

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Authors

Alesina, Alberto (Department of Economics, Harvard University, 324 Littauer, Cambridge, MA 02138 and National Bureau of Economic Research, and Centre for Economic Policy Research)
Ardagna, Silvia (Department of Economics, Wellesley College, Wellesley, MA 02481)
Perotti, Roberto (Department of Economics, European University Institute, via dei Roccettini 9/16, 50016 San Domenico di Fiesole (FI), Italy, and CEPR)
Schiantarelli, Fabio (Department of Economics, Boston College, Chestnut Hill, MA 02467, and IZA)


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