Fiscal Shocks in an Efficiency Wage Model

23 Pages Posted: 5 May 2000 Last revised: 15 Oct 2010

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 analyzes the ability of a general equilibrium efficiency wage model to account for the estimated response of hours worked and of real wages to a fiscal policy shock. Our key finding is that the model cannot do so unless we make the counterfactual assumption that marginal tax rates are constant. The model shares the strengths and weaknesses of high labor supply elasticity Real Business Cycle models. In particular it can account for the conditional volatility of real wages and hours worked. But it cannot account for the temporal pattern of how these variables respond to a fiscal policy shock and generates a counterfactual negative conditional correlation between government purchases and hours worked.

Suggested Citation

Burnside, Craig and Eichenbaum, Martin and Fisher, Jonas D. M., Fiscal Shocks in an Efficiency Wage Model (January 2000). NBER Working Paper No. w7515, Available at SSRN: https://ssrn.com/abstract=217868

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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United States

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