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Does Neoclassical Theory Account for the Effects of Big Fiscal Shocks? Evidence From World War II

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Ellen R. McGrattan
Lee E. Ohanian

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Abstract

There is much debate about the usefulness of the neoclassical growth model for assessing the macro- economic impact of fiscal shocks. We test the theory using data from World War II, which is by far the largest fiscal shock in the history of the United States. We take observed changes in fiscal policy during the war as inputs into a parameterized, dynamic general equilibrium model and compare the values of all variables in the model to the actual values of these variables in the data. Our main finding is that the theory quantitatively accounts for macroeconomic activity during this big fiscal shock.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12130.

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Date of creation: Apr 2006
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Handle: RePEc:nbr:nberwo:12130

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E0 - Macroeconomics and Monetary Economics - - General
E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Tenhofen, Jörn & Wolff, Guntram B., 2007. "Does anticipation of government spending matter? Evidence from an expectation augmented VAR," Discussion Paper Series 1: Economic Studies 2007,14, Deutsche Bundesbank, Research Centre. [Downloadable!]
  2. Michele P. Cavallo, 2005. "Government employment and the dynamic effects of fiscal policy shocks," Working Papers in Applied Economic Theory 2005-16, Federal Reserve Bank of San Francisco. [Downloadable!]
  3. Pierre-Daniel G. Sarte, 2006. "Stark optimal fiscal policies and sovereign lending," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 337-352. [Downloadable!]
  4. Ellen R. McGrattan & Lee E. Ohanian, 2006. "Does Neoclassical Theory Account for the Effects of Big Fiscal Shocks? Evidence From World War II," NBER Working Papers 12130, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Siu, Henry, 2006. "The fiscal role of conscription in the US World War II effort," UBC Departmental Archives siu-06-04-26-12-42-20, UBC Department of Economics, revised 26 Apr 2006. [Downloadable!]
  6. Rafael Domenech & Javier Andres, 2005. "Fiscal Rules and Macroeconomic Stability," Working Papers 0501, International Economics Institute, University of Valencia, revised Nov 2005. [Downloadable!]
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