ECONOMIC GROWTH AND THE EFFECTS OF FISCAL POLICY

The macroeconomic effects of fiscal policy are analyzed using a Keynesian growth model. Comparative static analysis shows that the long-run effects of an increase in public spending and a decrease in taxation on economic growth and government budget balance depend on the relative size of marginal propensity to consume and invest and could be positive under certain conditions. Empirical estimates show that consumption and production structure have changed significantly from 1930s to 2007; both positive and negative effects on growth and budget balance of the same fiscal policy are found in different time periods.