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Fiscal shocks and their consequences

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  • Burnside, Craig
  • Eichenbaum, Martin
  • Fisher, Jonas D. M.

Abstract

This paper investigates the response of hours worked and real wages to fiscal policy shocks in the U.S. during the post World War II era. We identify these shocks with exogenous changes in military purchases and argue that they lead to a persistent increase in government purchases and tax rates on capital and labor income, and a persistent rise in aggregate hours worked as well as declines in real wages. The shocks are also associated with short lived rises in aggregate investment and small movements in private consumption. We describe and implement a methodology for assessing whether standard neoclassical models can account for the consequences of a fiscal policy shock. Simple versions of the neoclassical model can account for the qualitative effects of a fiscal shock. Once we allow for habit formation and investment adjustment costs, the model can also account reasonably well for the quantitative effects of a fiscal shock.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 115 (2004)
Issue (Month): 1 (March)
Pages: 89-117

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Handle: RePEc:eee:jetheo:v:115:y:2004:i:1:p:89-117

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Web page: http://www.elsevier.com/locate/inca/622869

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References

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  1. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, American Economic Association, vol. 83(3), pages 315-34, June.
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  13. Ohanian, Lee E, 1997. "The Macroeconomic Effects of War Finance in the United States: World War II and the Korean War," American Economic Review, American Economic Association, American Economic Association, vol. 87(1), pages 23-40, March.
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  15. Burnside, Craig & Eichenbaum, Martin, 1996. "Factor-Hoarding and the Propagation of Business-Cycle Shocks," American Economic Review, American Economic Association, American Economic Association, vol. 86(5), pages 1154-74, December.
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  1. Is it Possible that the President thinks Economists Agree That Spending is the Answer?
    by Matt Mitchell in Neighborhood Effects on 2010-10-05 18:18:32
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