Fiscal Spending Shocks and the Price of Investment: Evidence from a Panel of Countries

The effects of fiscal spending shocks are estimated by the introduction of a measure of fiscal policy into the neoclassical growth model via a parametric function that distorts the value of newly created capital. The model is estimated by Method of Simulated Moments (MSM) via conditional moments (IRFs) from a panel of countries. We find that fiscal spending distortions cannot be rejected as an important determinant for deviations in the relative price of investment for the OECD countries. An implication is that a one standard error shock to fiscal spending can increase GDP by as much as 1.12 percent over an eight year horizon. Alternatively, the price of investment seems not to be affected by fiscal policy shocks in less developed countries.