Assessing the Effects of Fiscal Shocks

45 Pages Posted: 8 Aug 2012

See all articles by A. Craig Burnside

A. Craig Burnside

Duke University - Department of Economics; University of Glasgow - Department of Economics; National Bureau of Economic Research (NBER)

Martin Eichenbaum

Northwestern University; National Bureau of Economic Research (NBER)

Jonas D. M. Fisher

Federal Reserve Bank of Chicago - Economic Research Department

Date Written: January 2000

Abstract

This paper investigates the response of real wages and hours worked to an exogenous shock in fiscal policy. We identify this shock with the dynamic response of government purchases and tax rates to an exogenous increase in military purchases. The fiscal shocks that we isolate are characterized by highly correlated increases in government purchases, tax rates and hours worked as well as persistent declines in real wages. We assess the ability of standard Real Business Cycle models to account for these facts. They can-but only under the assumption that marginal income tax rates are constant, a standard assumption in the literature. Once we abandon this counterfactual assumption, RBC models cannot account for the facts. We argue that our empirical findings pose a challenge to a wide class of business cycle models.

Suggested Citation

Burnside, Craig and Eichenbaum, Martin and Fisher, Jonas D. M., Assessing the Effects of Fiscal Shocks (January 2000). NBER Working Paper No. w7459, Available at SSRN: https://ssrn.com/abstract=214649

Craig Burnside (Contact Author)

Duke University - Department of Economics ( email )

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University of Glasgow - Department of Economics

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Martin Eichenbaum

Northwestern University ( email )

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National Bureau of Economic Research (NBER)

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Jonas D. M. Fisher

Federal Reserve Bank of Chicago - Economic Research Department ( email )

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Chicago, IL 60604-1413
United States

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