Fiscal shocks in an efficiency wage model

Craig Burnside, Martin Eichenbaum and Jonas Fisher

No WP-99-19, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: This paper illustrates a particular limited information strategy for assessing the empirical plausibility of alternative quantitative general equilibrium business cycle models. The basic strategy is to test whether a model economy can account for the response of actual economy to an exogenous shock. Here we concentrate on the response of aggregate hours worked and real wages to a fiscal policy shock. The fiscal policy shock is identified with the dynamic response of government purchases and averages marginal income tax rates to an exogenous increase in military purchases. Burnside, Eichenbaum and Fisher (1999) show that standard Real business Cycle models cannot account for the salient features of how hours worked and after - tax real wages respond to a fiscal policy shock. In this paper we show that this failure extends to a class of business cycle models in which the labor is characterized by efficiency wages.

Keywords: Fiscal policy; Wages (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-pub
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Working Paper: Fiscal Shocks in an Efficiency Wage Model (2000)
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