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. (Citation2002).
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 (Citation1991) and Johansen (Citation1995).
4Note that, although the t-statistic for the cointegration coefficient for R in is relatively small this coefficient is taken as significant.