Working Paper: NBER ID: w12130
Authors: Ellen R. McGrattan; Lee E. Ohanian
Abstract: There is much debate about the usefulness of the neoclassical growth model for assessing the macro-economic 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.
Keywords: neoclassical growth model; fiscal shocks; World War II; government spending; macroeconomic impact
JEL Codes: E0; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government spending (H59) | economic output (E23) |
| government spending (H59) | real GNP (E10) |
| government spending (H59) | investment (G31) |
| government spending (H59) | consumption (E21) |
| government spending (H59) | labor supply (J20) |
| productivity shocks (O49) | wartime economic boom (H56) |
| tax rates (H29) | labor supply (J20) |
| government spending (H59) | labor hours (J22) |
| higher taxes (H29) | labor hours (J22) |