Fiscal policy, profits and investment: some additional evidence

Abstract

This article provides time series evidence on the effects of fiscal policy on profits and investment in the US. In addition to neoclassical models of investment and profits we also consider Keynesian models. Our findings provide some support for the neoclassical views. However, Keynesian explanations, which allow for the effects of the real interest rate, receive strong support from the data.

Notes

¹See, Alesina et al. (2002).

²The real interest rate is calculated as follows: real interest rate = 100 ∗ (nominal interest rate – inflation rate)/(100 + inflation rate), where inflation rate is calculated as log(P) – log(P)₋₄, and P is the seasonally adjusted GDP chain type price index.

³See Johansen (1991) and Johansen (1995).

⁴Note that, although the t-statistic for the cointegration coefficient for R in Table 5 is relatively small this coefficient is taken as significant.