The last few years have seen important advances in methodologies for testing for both
short-run and long-run impacts of fiscal policy on growth but with results from shortand
long-run approaches generally difficult to compare. In addition, the ‘long-run’ in
most studies is typically identified using cross-section or panel methods applied to
period-averaged data, with assumed common impacts across countries. As a result
long-run fiscal impacts are identified rather crudely and estimated, or assumed, to take
5–10 years or more to affect long-run output growth rates. However, as Pesaran and
Smith (1995) and others have argued, assuming incorrectly that such parameters are
homogeneous across countries is likely to bias results.
The last few years have seen important advances in methodologies for testing for bothshort-run and long-run impacts of fiscal policy on growth but with results from shortandlong-run approaches generally difficult to compare. In addition, the ‘long-run’ inmost studies is typically identified using cross-section or panel methods applied toperiod-averaged data, with assumed common impacts across countries. As a resultlong-run fiscal impacts are identified rather crudely and estimated, or assumed, to take5–10 years or more to affect long-run output growth rates. However, as Pesaran andSmith (1995) and others have argued, assuming incorrectly that such parameters arehomogeneous across countries is likely to bias results.
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