The Macroeconomic Effects of Military Buildups in a New Neoclassical Synthesis Framework

Alain Paquet, Louis Phaneuf and Nooman Rebei

Staff Working Papers from Bank of Canada

Abstract: The authors study the macroeconomic consequences of large military buildups using a New Neoclassical Synthesis (NNS) approach that combines nominal rigidities within imperfectly competitive goods and labour markets. They show that the predictions of the NNS framework generally are consistent with the sign, timing, and magnitude of how hours worked, after-tax real wages, and output actually respond to an upsurge in military purchases. The key factors leading to these findings are: (i) variations in the ratio of price to marginal cost resulting from nominal-price inflexibilities, (ii) staggered nominal-wage setting, and (iii) time-varying marginal tax rates. Unlike the standard neoclassical model, the NNS framework successfully explains the macroeconomic effects of military buildups when taxes are distortionary.

Keywords: Fiscal policy; Economic models; Business fluctuations and cycles (search for similar items in EconPapers)
JEL-codes: E32 E62 H2 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2003
New Economics Papers: this item is included in nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:03-12

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