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

24 Pages Posted: 4 Jun 2010

See all articles by Ellen R. McGrattan

Ellen R. McGrattan

Federal Reserve Bank of Minneapolis - Research Department; University of Minnesota - Twin Cities; National Bureau of Economic Research (NBER)

Lee E. Ohanian

University of California, Los Angeles (UCLA) - Department of Economics; National Bureau of Economic Research (NBER)

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Abstract

Much debate surrounds the usefulness of the neoclassical growth model for assessing the macroeconomic 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.

Suggested Citation

McGrattan, Ellen R. and Ohanian, Lee E., Does Neoclassical Theory Account for the Effects of Big Fiscal Shocks? Evidence from World War II. International Economic Review, Vol. 51, Issue 2, pp. 509-532, May 2010, Available at SSRN: https://ssrn.com/abstract=1611960 or http://dx.doi.org/10.1111/j.1468-2354.2010.00591.x

Ellen R. McGrattan (Contact Author)

Federal Reserve Bank of Minneapolis - Research Department ( email )

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Lee E. Ohanian

University of California, Los Angeles (UCLA) - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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