Does Neoclassical Theory Account for the Effects of Big Fiscal Shocks?

Download or read book Does Neoclassical Theory Account for the Effects of Big Fiscal Shocks? written by Ellen R. McGrattan and published by . This book was released on 2006 with total page 66 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.