Gregor Smith forwards me this paper (coauthored with Nicolas-Guillaume Martineau) that estimates the impact of government spending growth on real GDP growth, using data from a cross-section of countries during the interwar period 1920-1939. Here is their abstract:
Diﬀerences across countries or decades in the countercyclical stance of ﬁscal policy can help identify whether the growth in government spending aﬀects output growth and so speeds recovery from a recession. We use the heterogeneity in the government-spending reaction functions across twenty countries in the interwar period to identify this eﬀect. The main ﬁnding is that the growth of government spending did not have a signiﬁcant eﬀect on output growth, so that there is little evidence that this central aspect of ﬁscal policy played a stabilizing role from 1920 to 1939.
As usual, a lot depends on the plausibility of the identifying assumptions employed.
The limitations of the data, in frequency and coverage, may prevent us from reaching a precise answer about the eﬃcacy of ﬁscal policy, but it is still of interest to know whether that is the conclusion. Of course, the answer and its precision depend on an identiﬁcation scheme. This paper adopts a new one: the main identifying assumption is that countercyclical ﬁscal policy could have worked in any country but was not tried to the same extent in every country. Identiﬁcation relies on diﬀerences across countries (or over time) in ﬁscal reaction functions that capture the response of government spending to national income. We use these diﬀerences to estimate the eﬀect of this government spending on the growth of income in turn.
The authors conclude (in a rather provocative and un-Canadian manner, I might add), that the evidence over this period fits better the infamous “Treasury view.”
If you have some thoughts to share on their identification scheme and/or interpretation of their results, please feel free to comment. I’m sure the authors would appreciate your feedback.