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.The recent global recession has brought renewed interest in the question: 'Can fiscal policy affect the growth rate of output?' If so, are these effects temporary (affecting only output levels over the longer-run) or permanent (so that output growth rates are persistently higher)? Perhaps surprisingly, the literatures looking for growth impacts of fiscal policy over the short-run (say, up to five years) and over the longer-run of 10 years or more, have tended to be quite distinct and followed quite different methodologies.This article considers how far the results from these two literatures are consistent. To do so, we apply the 'heterogeneous panel' econometric methods -Mean Group and Pooled Mean Group -proposed by Pesaran and Smith (1995), Pesaran (1997) and Pesaran et al. (1999) to an annual panel dataset for OECD countries. These methods allow both long-run equilibrium relationships, and short-run dynamic adjustments around those equilibria, to be investigated simultaneously. In brief, our results support the conclusion that changes in fiscal structure (that is, between different types of tax and ⁄ or forms of expenditure) can affect GDP growth rates over the long-run, at least to the extent these are captured by the 30-35 year time dimension of our dataset. This 'long-run result', however, appears to be achieved within a short period of a few years following relevant fiscal changes, suggesting relatively rapid short-run adjustment to a new long-run growth rate equilibrium.

This article examines whether the efficiency gains accompanying fiscal decentralization generate higher growth in more decentralized economies, applying pooled-mean group techniques to a panel dataset of 23 Organization for Economic Co-operation and Development (OECD) countries, 1972-2005. We find that spending decentralization has tended to be associated with lower economic growth while revenue decentralization has been associated with higher growth. Since OECD countries are substantially more spending than revenue decentralized, this is consistent with Oates' (1972) hypothesis that maximum efficiency gains require a close match between spending and revenue decentralization. It suggests reducing expenditure decentralization, and simultaneously increasing the fraction financed locally, would be growth-enhancing. (JEL E62, H71, H72) *We thank three anonymous referees and the Editor of this journal for helpful comments on an earlier draft.

No abstract

We examine the long-run GDP impacts of changes in total government expenditure and in the shares of different spending categories for a sample of OECD countries since the 1970s, taking account of methods of financing expenditure changes and possible endogenous relationships. We provide more systematic empirical evidence than available hitherto for OECD countries, obtaining strong evidence that reallocating total spending towards infrastructure and education is positive for long-run output levels. Reallocating spending towards social welfare (and away from all other expenditure categories pro-rata) may be associated with modest negative effects on output in the long run.Word count: 11.961 JEL codes: H50; O40

This paper explores the merits of macro-and micro-based tax rate measures within an open economy 'fiscal policy and growth' model. Using annual data for 15 OECD countries we find statistically small, non-robust long-run growth effects of macro-based average tax rates on capital income and consumption, but some evidence for average labor income tax effects. Changes in 'micro' marginal income tax rates at both the personal and corporate levels yield statistically robust GDP responses of modest size. Both domestic and foreign corporate taxes appear relevant. In general, tax effects on GDP operate largely via factor productivity rather than factor accumulation.