Government Policy Response to War-Expenditure Shocks
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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Volume (Year): 12 (2012)
Issue (Month): 1 (July)
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