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Fiscal Policy in the Aftermath of 9/11

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  • Martin Eichenbaum
  • Jonas Fisher

Abstract

This paper investigates the nature of U.S. fiscal policy in the aftermath of 9/11. We argue that the recent dramatic fall in the government surplus and the large fall in tax rates cannot be accounted for by either the state of the U.S. economy as of 9/11 or as the typical response of fiscal policy to a large exogenous rise in military expenditures. Our evidence suggests that, had tax rates responded in the way they `normally' do to large exogenous changes in government spending, aggregate output would have been lower and the surplus would not have changed by much. The unusually large fall in tax rates had an expansionary impact on output and was the primary force underlying the large decline in the surplus. Our results do not bear directly on the question of whether the decline in tax rates and the decline in the surplus after 9/11 were desirable or not.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 10430.

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Date of creation: Apr 2004
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Publication status: published as Eichenbaum, Martin & Fisher, Jonas D M, 2005. "Fiscal Policy in the Aftermath of 9/11," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(1), pages 1-22, February.
Handle: RePEc:nbr:nberwo:10430

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  1. Rotemberg, Julio J & Woodford, Michael, 1992. "Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 100(6), pages 1153-1207, December.
  2. Craig Burnside & Martin Eichenbaum & Jonas Fisher, 2003. "Fiscal Shocks and Their Consequences," NBER Working Papers 9772, National Bureau of Economic Research, Inc.
  3. Lawrence J. Christiano & Martin Eichenbaum, 1990. "Current real business cycle theories and aggregate labor market fluctuations," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 24, Federal Reserve Bank of Minneapolis.
  4. Lawrence J. Christiano, 1998. "Solving dynamic equilibrium models by a method of undetermined coefficients," Working Paper 9804, Federal Reserve Bank of Cleveland.
  5. Wendy Edelberg & Martin Eichenbaum & Jonas D.M. Fisher, 1999. "Understanding the Effects of a Shock to Government Purchases," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 166-206, January.
  6. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(1), pages 3-16, January.
  7. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(1), pages 1-45, February.
  8. David Card, 1991. "Intertemporal Labor Supply: An Assessment," NBER Working Papers 3602, National Bureau of Economic Research, Inc.
  9. Valerie A. Ramey & Matthew D. Shapiro, 1999. "Costly Capital Reallocation and the Effects of Government Spending," NBER Working Papers 6283, National Bureau of Economic Research, Inc.
  10. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
  11. Lawrence J. Christiano & Jonas D. M. Fisher, 2003. "Stock Market and Investment Goods Prices: Implications for Macroeconomics," NBER Working Papers 10031, National Bureau of Economic Research, Inc.
  12. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
  13. Hansen, Gary D., 1985. "Indivisible labor and the business cycle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 16(3), pages 309-327, November.
  14. Pencavel, John, 1987. "Labor supply of men: A survey," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & R. Layard (ed.), Handbook of Labor Economics, edition 1, volume 1, chapter 1, pages 3-102 Elsevier.
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