Fiscal shocks and their consequences

Burnside, C. , Eichenbaum, M. and Fisher, J. (2004) Fiscal shocks and their consequences. Journal of Economic Theory, 115(1), pp. 89-117. (doi:10.1016/S0022-0531(03)00252-7)

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This paper investigates the response of hours worked and real wages to fiscal policy shocks in the post-World-War II US. We identify these shocks with exogenous changes in military purchases and argue that they lead to a persistent increase in government purchases and tax rates on capital and labor income, and a persistent rise in aggregate hours worked as well as declines in real wages. The shocks are also associated with short lived rises in aggregate investment and small movements in private consumption. We describe and implement a methodology for assessing whether standard neoclassical models can account for the consequences of a fiscal policy shock. Simple versions of the neoclassical model can account for the qualitative effects of a fiscal shock. Once we allow for habit formation and investment adjustment costs, the model can also account reasonably well for the quantitative effects of a fiscal shock.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Burnside, Professor Craig
Authors: Burnside, C., Eichenbaum, M., and Fisher, J.
Subjects:H Social Sciences > HB Economic Theory
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Journal of Economic Theory
Published Online:23 August 2003

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