TY  - JOUR
AU  - Burnside,Craig
AU  - Eichenbaum,Martin
AU  - Fisher,Jonas D.M.
TI  - Assessing the Effects of Fiscal Shocks
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7459
PY  - 2000
Y2  - January 2000
UR  - http://www.nber.org/papers/w7459
L1  - http://www.nber.org/papers/w7459.pdf
N1  - Author contact info:
Craig Burnside
Department of Economics
Duke University
213 Social Sciences Building
Durham, NC 27708-0097
Tel: 919/660-1808
Fax: 919/684-8974
E-Mail: craig.burnside@duke.edu

Martin S. Eichenbaum
Department of Economics
Northwestern University
2003 Sheridan Road
Evanston, IL  60208
Tel: 847/491-8232
Fax: 847/491-7001
E-Mail: eich@northwestern.edu

Jonas Fisher
Economic Research Department
Federal Reserve Bank of Chicago
230 South LaSalle Street
Chicago, IL  60604
Tel: 312/312-8177
Fax: NA
E-Mail: jfisher@frbchi.org
AB  - This paper investigates the response of real wages and hours worked to an exogenous shock in fiscal policy.  We identify this shock with the dynamic response of government purchases and tax rates to an exogenous increase in military purchases.  The fiscal shocks that we isolate are characterized by highly correlated increases in government purchases, tax rates and hours worked as well as persistent declines in real wages.    We assess the ability of standard Real Business Cycle models to account for these facts.  They can-but only under the assumption that marginal income tax rates are constant, a standard assumption in the literature.  Once we abandon this counterfactual assumption, RBC models cannot account for the facts.  We argue that our empirical findings pose a challenge to a wide class of business cycle models.
ER  -