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The Macroeconomic Effects of Military Buildups in a New Neoclassical Synthesis Framework

Author

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  • Alain Paquet
  • Louis Phaneuf
  • Nooman Rebei

Abstract

The authors study the macroeconomic consequences of large military buildups using a New Neoclassical Synthesis (NNS) approach that combines nominal rigidities within imperfectly competitive goods and labour markets. They show that the predictions of the NNS framework generally are consistent with the sign, timing, and magnitude of how hours worked, after-tax real wages, and output actually respond to an upsurge in military purchases. The key factors leading to these findings are: (i) variations in the ratio of price to marginal cost resulting from nominal-price inflexibilities, (ii) staggered nominal-wage setting, and (iii) time-varying marginal tax rates. Unlike the standard neoclassical model, the NNS framework successfully explains the macroeconomic effects of military buildups when taxes are distortionary.

Suggested Citation

  • Alain Paquet & Louis Phaneuf & Nooman Rebei, 2003. "The Macroeconomic Effects of Military Buildups in a New Neoclassical Synthesis Framework," Staff Working Papers 03-12, Bank of Canada.
  • Handle: RePEc:bca:bocawp:03-12
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal policy; Economic models; Business fluctuations and cycles;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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