Fiscal Shocks and Their Consequences

45 Pages Posted: 15 Jun 2003 Last revised: 3 Nov 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: June 2003

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.

Suggested Citation

Burnside, Craig and Eichenbaum, Martin and Fisher, Jonas D. M., Fiscal Shocks and Their Consequences (June 2003). NBER Working Paper No. w9772, Available at SSRN: https://ssrn.com/abstract=416265

Craig Burnside

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

University of Glasgow - Department of Economics

Adam Smith Building
Glasgow, Scotland G12 8RT
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Martin Eichenbaum (Contact Author)

Northwestern University ( email )

2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8232 (Phone)
847-491-7001 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jonas D. M. Fisher

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

230 South LaSalle Street
Chicago, IL 60604-1413
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
48
Abstract Views
864
PlumX Metrics