Testing the implications of long-run neutrality with monetary business cycle models
In: Discussion paper 93-25
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In: Discussion paper 93-25
In: CAMA Working Paper No. 60/2017
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Working paper
In: Journal of economic dynamics & control, Band 19, Heft 1-2, S. 253-278
ISSN: 0165-1889
In: Sveriges Riksbank Working Paper Series No. 305
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Working paper
In: CAMA Working Paper No. 7/2014
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In: FRB of Philadelphia Working Paper No. 13-34
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Working paper
In: FRB of Philadelphia Working Paper No. 12-4
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In: CAMA Working Paper 44/2012
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In: FRB of Philadelphia Working Paper No. 12-24
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Working paper
In: Cliometrica: journal of historical economics and econometric history, Band 6, Heft 2, S. 115-142
ISSN: 1863-2513
In: CAMA Working Paper Series 2/2011
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Working paper
In: American economic review, Band 97, Heft 2, S. 290-294
ISSN: 1944-7981
The United Kingdom employed the McKenna rule to conduct fiscal policy during World War I (WWI) and the interwar period. Named for Reginald McKenna, Chancellor of the Exchequer (1915–16), the McKenna rule committed the United Kingdom to a path of debt retirement, which we show was forward-looking and smoothed in response to shocks to the real economy and tax rates. The McKenna rule was in the tradition of the English method of war finance because the United Kingdom taxed capital to finance WWI. Higher rates of capital taxation also paid for debt retirement during and subsequent to WWI. The United Kingdom was motivated to implement the McKenna rule because of a desire to achieve a balance between fairness and equity. However, the McKenna rule adversely affected the real economy, according to a permanent income model. WWI and interwar U.K. data support the prediction that real activity is lower in response to higher past debt retirement rates.
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Benjamin and Kochin (1979, Journal of Political Economy) present regression estimates to support their hypothesis that larger unemployment benefits increased U.K. unemployment post–World War I (WWI). The Benjamin-Kochin (BK) regression is easy to replicate. When the replication is widened to include income tax rates and WWI observations using Bayesian Monte Carlo methods, the evidence moves against the BK hypothesis and in favor of regressions that include the capital income tax rate. We explain these results with Daunton (2002, Just Taxes). He argues that U.K. tax rates were set during WWI and the interwar period to achieve an equitable, or "just," mix of taxes and debt. Neoclassical theory suggests that capital income tax rates fluctuations created inefficient factor input allocations that drove up interwar U.K. unemployment.
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