Fiscal Policy Impacts on Growth in the OECD : Are They Long - Run ?

The literature testing for long-run impacts of fiscal policy on growth at the macro level has generally ignored short-run dynamics and treated all counties’ fiscal-growth dynamics identically. This paper examines how robust previous ‘long-run’ results for OECD countries are to new empirical methods that model short-run dynamics and allow fiscal-growth responses to be heterogeneous both across countries and over time. Our results suggest that most of the so-called ‘long-run’ growth effects of fiscal policy are typically achieved very quickly. We also find that positive growth effects of fiscal changes have often been approximately counteracted by fiscal changes with negative effects.