Working Paper: NBER ID: w9772
Authors: Craig Burnside; Martin Eichenbaum; Jonas Fisher
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.
Keywords: No keywords provided
JEL Codes: E1; E6
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exogenous increases in military purchases (H56) | persistent rise in government purchases (E62) |
| exogenous increases in military purchases (H56) | persistent rise in tax rates on capital and labor income (H31) |
| persistent rise in government purchases (E62) | increase in aggregate hours worked (J29) |
| persistent rise in government purchases (E62) | decline in real wages (F66) |
| exogenous increases in military purchases (H56) | short-lived rises in aggregate investment (E22) |
| exogenous increases in military purchases (H56) | minor movements in private consumption (D19) |
| increase in government purchases (H59) | boom in hours worked (J29) |
| increase in government purchases (H59) | fall in real wages (J39) |