Fiscal shocks and their consequences
Abstract
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. © 2003 Elsevier
Inc. All rights reserved.
Type
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https://hdl.handle.net/10161/2018Published Version (Please cite this version)
10.1016/S0022-0531(03)00252-7Publication Info
Burnside, C; Eichenbaum, M; & Fisher, JDM (2004). Fiscal shocks and their consequences. Journal of Economic Theory, 115(1). pp. 89-117. 10.1016/S0022-0531(03)00252-7. Retrieved from https://hdl.handle.net/10161/2018.This is constructed from limited available data and may be imprecise. To cite this
article, please review & use the official citation provided by the journal.
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