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

Ellen McGrattan and Lee Ohanian

No 12130, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: E0 E6 (search for similar items in EconPapers)
Date: 2006-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-his, nep-mac and nep-pbe
Note: EFG
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Citations: View citations in EconPapers (8)

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.

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Journal Article: DOES NEOCLASSICAL THEORY ACCOUNT FOR THE EFFECTS OF BIG FISCAL SHOCKS? EVIDENCE FROM WORLD WAR II (2010)
Working Paper: Does neoclassical theory account for the effects of big fiscal shocks? Evidence from World War II (2008)
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