The McKenna rule and U.K. World War I finance
AbstractThe United Kingdom employed the McKenna rule to conduct fiscal policy during World War I (WWI) and the interwar period. Named for Reginald McKenna, Chancellor of the Exchequer (1915–16), the McKenna rule committed the United Kingdom to a path of debt retirement, which we show was forward-looking and smoothed in response to shocks to the real economy and tax rates. The McKenna rule was in the tradition of the “English method” of war finance because the United Kingdom taxed capital to finance WWI. Higher rates of capital taxation also paid for debt retirement during and subsequent to WWI. The United Kingdom was motivated to implement the McKenna rule because of a desire to achieve a balance between fairness and equity. However, the McKenna rule adversely affected the real economy, according to a permanent income model. WWI and interwar U.K. data support the prediction that real activity is lower in response to higher past debt retirement rates.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2007-03.
Date of creation: 2007
Date of revision:
Other versions of this item:
- James M Nason & Shaun P Vahey, 2007. "The McKenna Rule and UK World War I Finance," Reserve Bank of New Zealand Discussion Paper Series DP2007/08, Reserve Bank of New Zealand.
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- N4 - Economic History - - Government, War, Law, International Relations, and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-02-17 (All new papers)
- NEP-HIS-2007-02-17 (Business, Economic & Financial History)
- NEP-PBE-2007-02-17 (Public Economics)
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