| The dissertation studies what determines the different response of the economy to fiscal stabilizations, and fiscal policy in general, and investigates the channels through which fiscal policy influence the macroeconomy. The first chapter analyzes the determinants and channels through which fiscal stabilizations influence the dynamics of the debt-to-GDP ratio and GDP growth. Using data from a panel of OECD countries, the chapter shows that the success of fiscal adjustments in decreasing the debt-to-GDP ratio depends on the size of the improvement in the primary balance. The composition of fiscal policy and the rate of growth of output are less important. In contrast, whether a fiscal adjustment is expansionary depends largely on the composition of the fiscal maneuver. The effects of the composition on growth work mostly through the labor market rather than through agents' expectations of future fiscal policy. Finally, the evidence suggests that successful and expansionary fiscal contractions are not the result of accompanying expansionary monetary policy or exchange rate devaluations. The second chapter (joint work with Alesina, Perotti, and Schiantarelli) evaluates the effects of fiscal policy on investment using a panel of OECD countries. In particular, we investigate how different types of fiscal policy affect profits and, as a result, investment. We find a sizeable negative effect of public spending—and in particular of its public wage component—on business investment. This result is consistent with models in which government employment creates wage pressure for the private sector. Various types of taxes also have negative effects on profits, but, interestingly, the effects of government spending on investment are larger than the effect of taxes. Our results have important implications for the so called “non-Keynesian” (i.e. expansionary) effects of fiscal adjustments. The third chapter sets up a dynamic general equilibrium model, and investigates the long and short run effects that changes in different spending and revenue items of the budget have on the economy when the labor market is unionized. The model is calibrated using average data for the European countries and finds support for the labor market channel in general equilibrium as well. |