Full text of Working Papers (Federal Reserve Bank of Chicago) : Assessing the Effects of Fiscal Shocks, Working Paper 1999-18

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Assessing the Effects of Fiscal Shocks*

Working Papers Series

Craig Burnside, Martin Eichenbaum and
Jonas D.M. Fisher

Working Papers Series
Research Department
WP-99-18
Federal Reserve Bank of Chicago

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Wdeoh 71 Jrrgqhvv0ri0w Whvwv  Uhvsrqvh ri Uhdo Zdjhv zlwk Dowhuqdwlyh Prgho Vshflfdwlrqv

Figure 1: Fiscal Variables and the Ramey-Shapiro Dates, 1947-1994

Defense Spending

Government Purchases

6.08

7.25

5.92

7.00

5.76
6.75
5.60
6.50
5.44
6.25
5.28
6.00
5.12
5.75

4.96

4.80

5.50
1949

1959

1969

1979

1989

Share of Government Purchases in GDP
0.325

1949

1959

1969

1979

1989

Average Marginal Income Tax Rate
0.325

0.300

0.300

0.275
0.275
0.250
0.250
0.225
0.225
0.200

0.200

0.175

0.150

0.175
1949

1959

1969

1979

1989

1949

1959

1969

1979

1989

Figure 2: Estimated Responses of Fiscal and Labor Market Variables After a Ramey-Shapiro Episode

Government Purchases

Business Hours

35

35

30

30

25

25

20

20

15

15

10

10

5

5

0

0

-5

-5

-10

-10
0

3

6

9

12

15

Marginal Income Tax

0

3

6

9

12

15

After Tax Manufacturing Wages

7.5

2.5

0.0
5.0
-2.5

-5.0
2.5
-7.5

-10.0
0.0
-12.5

-2.5

-15.0
0

3

6

9

12

15

0

3

6

9

12

15

Figure 3: Labor Market Dynamics After a Ramey-Shapiro Episode in the Standard Model

Lump-sum tax specification
Hours

Distortionary tax specification
Hours

LD

LD

......

I
C'J

+-'

I

-

-.._-..._

...... ...._

--, --

...._

C'J

...._

~

+-'

~

Q.)
()
$....
Q.)

\

··\ ..

~

Q.)~

~

1\
1\

Q.)

LO

I

I'-

I

P-.C'J

I

-Estimate
0
1
j.J.,
..... j.J.,
10

I

........ .. ...

\

/

I

-'

''

LO

-~j.J.,

\
\

I'-

I
\

I

m

1_4

··.

~\

~ I

P-. C'J
I

/

\_

/

m

1_4

0 2 4 6 8 10 12
Quarters after shock

Real wages
·., ...
\
~'

········· ····.

0 2 4 6 8 10 12
Quarters after shock

Real wages

······

--- ---------_: -~---"'--

~

---

-

C'J

C'J

I

I

+-'

+-'

~

Q.)
()
$....
Q.)

\\

~

~
Q.ll.O

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......-

....::::::.-~-

._,

--

'-

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''

'

'-

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....

--

... ···

~ I

I

Q.)

P-.

P-.
I'-

I'-

I

I

m
I

m

~

~

I

~

1--4

~

0 2 4 6 8 10 12
Quarters after shock

1--4

0 2 4 6 8 10 12
Quarters after shock

Figure 4: Labor Market Dynamics After a Ramey-Shapiro Episode in the Alternative Models

5

=

CJ

Static Increasing Returns
Hours

Hours

/

<J)~

<J)

.....

/

co~

--- ' "
'

II

~C"::
~

1/
I

Cllo

co

,,

.....

~
~

:-,"' ············· ·····

,,_
'

-Estimate
f.J- -- f.J- f.J~

aJ

I

0
1
10

\

--------- --

" " -- _.

/

...,

<J)

\
\

.. - . . ...... --··

\"

C)

~

I''
I ',

Cl)...q<

0..1

\

aJ

~

_____

-

......

--

0..1

4 6 8 10
Quarters after shock

I

2

I

'\

-2 0

2

-- --

(7J
~

4 6 8 10
Quarters after shock

Real wages

Real wages

0

-

-- ~,-;:----- - - .
'
----------.. ·

~I

..... .. -

~

~co

f ~ --... _
...... -'·""---- - - ~ - - -

0
'~ ...
~-

--

C\2

I
~...q<

~I
C)

~

-

- - - - --.....

-

.....;-..--

C\1L

........

'._,
..... .....
.....
·.' ' ...
·.

--

·-

I

\

.........

'

~...q<

~I
~

~co

I

\

•. ,

~co

a> I

Cl)l
0..

-2 0 2 4 6 8 10
Quarters after shock

I

Real wages

0

~...q<

"

aJ

~

I

' ... ...

~

Cl)...q<

\

(7J

~

C\2

",

· ... ·'·,. . . . >., . . . .

\

C"::

-2 0

"

.'',

Cllo

\

I

......

___a:

~C"::
~

' I
.... ''I

!=:
a>o

/~

co

\

I

~C"::

Cl)...q<

0..1

I
I

Dynamic Increasing Returns
Hours

Cl)l
0..

0..

aJ

aJ

aJ

I

I

I

~

~

~

~

~

-2 0

2

4 6 8 10
Quarters after shock

I

~

-2 0

2

4 6 8 10
Quarters after shock

I

-2 0 2 4 6 8 10
Quarters after shock
Full text of Working Papers (Federal Reserve Bank of Chicago) : Assessing the Effects of Fiscal Shocks, Working Paper 1999-18

FRASER
