This paper studies the effects of discretionary fiscal policy on output volatility and economic growth. Using data for ninety-one countries we isolate three empirical regularities: (1) Governments that use fiscal policy aggressively induce significant macroeconomic instability; (2) The...

This paper presents an analysis of how alternative models of the business cycle can replicate the stylized fact that large governments are associated with less volatile economies. Our analysis shows that adding nominal rigidities and costs of capital adjustment to an otherwise standard RBC model...