Fiscal Shocks and Their Consequences

Craig Burnside, Martin Eichenbaum and Jonas Fisher

No 9772, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper investigates the response of hours worked and real wages to fiscal policy shocks in the U.S. during the post World War II era. 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.

JEL-codes: E1 E6 (search for similar items in EconPapers)
Date: 2003-06
New Economics Papers: this item is included in nep-mac
Note: EFG ME PE
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Citations: View citations in EconPapers (57)

Published as Burnside, Craig & Eichenbaum, Martin & Fisher, Jonas D. M., 2004. "Fiscal shocks and their consequences," Journal of Economic Theory, Elsevier, vol. 115(1), pages 89-117, March.

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Journal Article: Fiscal shocks and their consequences (2004)
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