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Over the Top: U.K. World War I Finance and Its Aftermath

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  • Shaun P. Vahey
  • James M. Nason

Abstract

We argue that the fiscal policies adopted early in World War I by the U.K. were responsible for its poor economic performance during the interwar period. In September 1915, the U.K. embarked on a set of non-tax-smoothing policies collectively known as the McKenna rule. The key dictum of the McKenna rule was to raise tax rates on labor and capital income in response to contemporaneous movements in government spending. The greater reliance on income taxation produced distortions in household and firm decision making that have not previously been studied. We construct and calibrate a real business cycle model to assess quantitatively the impact of the McKenna rule. The model generates paths for aggregate variables that resembles actual U.K. economic activity from 1916 onward

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 22.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:22

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Keywords: Fiscal Policy; War Finance; Tax Smoothing; Economic Growth.;

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Cited by:
  1. 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.

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