Date of Award


Document Type


Degree Name

Doctor of Philosophy (PhD)

First Advisor

Thomas R. Beard

Second Advisor

W. Douglas McMillin


This dissertation employs vector autoregressive techniques to improve our empirical understanding of fiscal and monetary policy and the effects of financial crisis in the interwar period. The issues investigated include: (a) the validity of the Ricardian equivalence and debt monetization hypotheses; (b) the effect of changes in the money supply on output, prices, and interest rates; (c) the impact of changes in average marginal tax rates and government expenditures on the macroeconomy; and (d) the effects of disruptions in financial intermediation and deterioration in the quality of private balance sheets on the macroeconomy. Two vector autoregressive models are estimated and variance decompositions (VDCs) and impulse response functions (IRFs) are calculated. In addition, a Monte Carlo integration procedure is used to calculate standard errors for these parameters. Deficits, government expenditures, average marginal tax rates, M2, the 4-6 month rate on prime commercial paper, the wholesale price index and industrial production entered the first VAR while the other is comprised of the aforementioned variables plus the yield differential between Baa corporate and long-term U.S. government bonds. The choice of these variables reflect theoretical considerations and the necessity to avoid omitted variables bias. In particular, the inclusion of average marginal tax rates is intended to control for the distortionary effects of taxes. Additionally, the inclusion of the yield differential is intended to capture the effects of financial crisis. It is important to note that these latter variables have not previously been included in a model of the type used here. The results generated are supportive of those studies that have found no significant role for deficits. Average marginal tax rates are found to have substantial effects on output, interest, and prices while the effects of the proxy for financial crisis on output, interest, prices, and money, are substantial. These results are supportive of the hypothesis that macroeconomic models which do not include measures of marginal tax rates and of the degree of financial crisis may be misspecified. More generally, the empirical regularities generated provide more support for Barro's market clearing approach when bonds are not net wealth than for any other theoretical framework.