Fiscal policy in general equilibrium: empirical estimates from an error correction model

Recent general equilibrium models of fiscal policy suggest that the governm ent purchases multiplier can exceed unity and that the multiplier should be larger in the long run that in the short run. These results follow from dy namic supply-side interactions of labour and capital, and are in sharp cont rast to the implications of earlier equilibrium models. A cointegrating reg ression and an error correction model are used to test these implications o f the equilibrium model of fiscal policy empirically. Data for post-war USA provide strong empirical support for the equilibrium model.