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Does Neoclassical Theory Account for the Effects of Big Fiscal Shocks? Evidence From World War II

  • Ellen R. McGrattan
  • Lee E. Ohanian

There is much debate about the usefulness of the neoclassical growth model for assessing the macro-economic impact of fiscal shocks. We test the theory using data from World War II, which is by far the largest fiscal shock in the history of the United States. We take observed changes in fiscal policy during the war as inputs into a parameterized, dynamic general equilibrium model and compare the values of all variables in the model to the actual values of these variables in the data. Our main finding is that the theory quantitatively accounts for macroeconomic activity during this big fiscal shock.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12130.

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Date of creation: Apr 2006
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Publication status: published as Ellen R. McGrattan & Lee E. Ohanian, 2010. "Does Neoclassical Theory Account For The Effects Of Big Fiscal Shocks? Evidence From World War Ii," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(2), pages 509-532, 05.
Handle: RePEc:nbr:nberwo:12130
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