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Government Policy Response to War-Expenditure Shocks

  • Martin Fernando M.

    ()

    (Federal Reserve Bank of St. Louis)

The U.S. has experienced three episodes in which public expenditure temporarily increased to very high levels: the Civil War, World War I and World War II. These wars share a set of stylized facts regarding the behavior of tax revenue, government debt, primary deficit, inflation and output. I present a theory of government policy determination, whose primary ingredients are intertemporal distortion-smoothing and limited commitment, that matches these regularities qualitatively and displays empirically plausible quantitative behavior.

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Article provided by De Gruyter in its journal The B.E. Journal of Macroeconomics.

Volume (Year): 12 (2012)
Issue (Month): 1 (July)
Pages: 1-40

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Handle: RePEc:bpj:bejmac:v:12:y:2012:i:1:n:25
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  1. Albert Marcet & Albert Scott, 2007. "Debt and Deficit Fluctuations and the Structure of Bond Markets," Working Papers 332, Barcelona Graduate School of Economics.
  2. S. Boragan Aruoba & Sanjay K. Chugh, 2006. "Optimal fiscal and monetary policy when money is essential," International Finance Discussion Papers 880, Board of Governors of the Federal Reserve System (U.S.).
  3. Morten O. Ravn & Harald Uhlig, 2002. "On adjusting the Hodrick-Prescott filter for the frequency of observations," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 371-375.
  4. Williamson, Stephen & Wright, Randall, 2010. "New Monetarist Economics: Models," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 2, pages 25-96 Elsevier.
  5. Fernando M. Martin, 2011. "Government policy in monetary economies," Working Papers 2011-026, Federal Reserve Bank of St. Louis.
  6. Shin, Yongseok, 2007. "Managing the maturity structure of government debt," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1565-1571, September.
  7. Aleksander Berentsen & Gabriele Camera, 2004. "Money, Credit, and Banking," 2004 Meeting Papers 473, Society for Economic Dynamics.
  8. Fernando Martin, 2009. "On the Joint Determination of Fiscal and Monetary Policy," Discussion Papers dp09-01, Department of Economics, Simon Fraser University.
  9. Fernando M. Martin, 2004. "A Positive Theory of Government Debt," Macroeconomics 0408013, EconWPA, revised 12 Oct 2004.
  10. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  11. Albert Marcet & Thomas J. Sargent & Juha Seppala, 1996. "Optimal taxation without state-contingent debt," Economics Working Papers 170, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2001.
  12. Aleksander Berentsen & Christopher Waller, 2008. "Outside Versus Inside Bonds," IEW - Working Papers 372, Institute for Empirical Research in Economics - University of Zurich.
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