NBER WORKING PAPER SERIES

FISCAL POLICY, PROFITS,AND INVESTMENT

Alberto AlesinaSilvia ArdagnaRoberto Perotti

Fabio Schiantarelli

Working Paper 7207http://www.nber.org/papers/w7207

NATIONAL BUREAU OF ECONOMIC RESEARCH1050 Massachusetts Avenue

Cambridge, MA 02138July 1999

We are very grateful to participants at the macroeconomic seminar at Harvard and MIT, University ofBologna, IGIER, the conference, “Empirical analysis of firms’ decisions” in Bergamo and, especially, toOlivier Blanchard, Glenn Hubbard, and Serena Ng for very useful suggestions. We also thank Giovanni Oliveifor his comments and Miguel Braun for research assistance. This research was supported by an NSF grantthrough the NBER; we thank both organizations for their support. All opinions expressed are those of theauthors and not those of the National Bureau of Economic Research.

© 1999 by Alberto Alesina, Silvia Ardagna, Roberto Perotti, and Fabio Schiantarelli. All rights reserved.Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided thatfull credit, including © notice, is given to the source.Fiscal Policy, Profits, and Investment

Alberto Alesina, Silvia Ardagna,Roberto Perotti, and Fabio SchiantarelliNBER Working Paper No. 7207July 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.

Alberto Alesina Silvia ArdagnaHarvard University Boston College324 Littauer Department of EconomicsCambridge, MA 02138 Chestnut Hill, MA 02162and NBER ardagna@bc.eduaalesina@kuznets.fas.harvard.edu

Roberto Perotti Fabio SchiantarelliColumbia University Boston CollegeDepartment of Economics Department of EconomicsNew York , NY 10027 Chestnut Hill, MA 02162rp41@columbia.edu schianta@bc.edu

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