Fiscal policy in general equilibrium: empirical estimates from an error correction model

Abstract

Recent general equilibrium models of fiscal policy suggest that the government purchases multiplier can exceed unity and that the multiplier should be larger in the long run that in the short run. These results follow from dynamic supply-side interactions of labour and capital, and are in sharp contrast to the implications of earlier equilibrium models. A cointegrating regression and an error correction model are used to test these implications of the equilibrium model of fiscal policy empirically. Data for post-war USA provide strong empirical support for the equilibrium model.