Maxwell L. King, Thomas S. Shively, Locally Optimal Testing When a Nuisance Parameter is Present Only Under the Alternative, The Review of Economics and Statistics, Vol. 75, No. 1 (Feb., 1993), pp. 1-7

This paper studies four classic fiscal-policy experiments within a quantitatively restricted neoclassical model. Our main findings are as follows: (i) permanent changes in government purchases can lead to short-run and long-run output multipliers that exceed 1; (ii) permanent changes in government purchases induce larger effects than temporary changes; (iii) the financing decision is quantitatively more important than the resource cost of changes in government purchases; and (iv) public investment has dramatic effects on private output and investment. These findings stem from important dynamic interactions of capital and labor absent in earlier equilibrium analyses of fiscal policy.

Reviews the book "Experimental Economics," by Douglas D. Davis and Charles A. Holt.

Neoclassical transitional dynamics are a central element of standard macroeconomic theory. Quantitative experiments with the fixed-savings-rate models of the 1960's showed lengthy transitions, thus potentially rationalizing sustained differences in growth rates across countries. We investigate quantitative transitional dynamics in various neoclassical models with intertemporally optimizing households. Lengthy transitions occur only with very low intertemporal substitution. Generally, when one tries to explain sustained economic growth with transitional dynamics, there are extremely counterfactual implications. These result from the fact that implied marginal products are extraordinarily high in the early stages of development.

We present cross-country evidence consistent with Schumpeter's view that the financial system can promote economic growth, using data on 80 countries over the 1960–1989 period. Various measures of the level of financial development are strongly associated with real per capita GDP growth, the rate of physical capital accumulation, and improvements in the efficiency with which economies employ physical capital. Further, the predetermined component of financial development is robustly correlated with future rates of economic growth, physical capital accumulation, and economic efficiency improvements.