Abstract
This paper investigates the long-run link between levels of output and fiscal policies from a neoclassical perspective for a sample of 19 OECD countries over the period 1970–98. As a departure from previous studies, we take explicit note of the time-series properties of the output, inputs and fiscal policy series. The use of new techniques in the field of nonstationary panels enables us to make reliable inferences about the existence of stochastic trends and cointegration among the series. We also estimate error correction growth models in order to gauge the growth effects of government size. Overall, we hold the view that fiscal policies play a crucial role in shaping steady-state levels of per capita income as well as economic growth rates along the transitional path.
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