The Timing and Persistence of Fiscal Policy Impacts on Growth: Evidence from OECD Countries

The literatures testing for aggregate short-run or long-run growth impacts of fiscal policy use quite different methodologies. The former generally focuses on temporary fiscal 'shocks'; the latter typically have no short-run dynamics or assume homogeneity. We use regression methods that treat heterogeneous short-run dynamics explicitly within a long-run model. Results suggest that previously estimated 'long-run' growth effects of fiscal policy are typically achieved quickly, consistent with results from short-run models. In principle these short-run effects 'persist'; in practice regular fiscal policy changes in OECD countries mean that persistent increases or decreases in growth rates are rare.