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Fiscal policy in the aftermath of 9/11

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  • Martin S. Eichenbaum
  • Jonas D. M. Fisher

Abstract

This paper investigates the nature of U.S. fiscal policy in the aftermath of 9/11. We argue that the recent dramatic fall in the government surplus and the large fall in tax rates cannot be accounted for by either the state of the U.S. economy as of 9/11 or as the typical response of fiscal policy to a large exogenous rise in military expenditures. Our evidence suggests that, had tax rates responded in the way they ?normally? do to large exogenous changes in government spending, aggregate output would have been lower and the surplus would not have changed by much. The unusually large fall in tax rates had an expansionary impact on output and was the primary force underlying the large decline in the surplus. Our results do not bear directly on the question of whether the decline in tax rates and the decline in the surplus after 9/11 were desirable or not.

Suggested Citation

  • Martin S. Eichenbaum & Jonas D. M. Fisher, 2004. "Fiscal policy in the aftermath of 9/11," Working Paper Series WP-04-06, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-04-06
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal policy; Terrorism;

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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