Barro, Robert J. 1987. Government Spending, Interest Rates, Prices, and Budget Deficits in the United Kingdom, 1701-1918. Journal of Monetary Economics 20 (2):221-47. (Electronic access to this paper is not available through the Reed Library. I will provide access for you as needed.)
Reading suggestions
This paper is discussed on pages 75-77 of Romer.
Compare Barro's Figure 2 to Romer's Figure 2.10.
Questions for analysis
Barro uses wars as episodes of temporary increases in government spending. What assumptions are necessary for this approach to be valid? How reasonable are these assumptions?
Barro uses long-term nominal interest rates whereas r in Romer's presentation of the Ramsey model is the instantaneous (shortest-term) real rate. What other factors must be held constant in order for this to be valid? How reasonable it is to assume that these are constant over the sample?
Briefly summarize the results of Section 2.4. To what extent do they conform to the predictions of the Ramsey model?
Section 3 explores the connection between wars, monetary policy, and prices. We have not yet introduced money into our model, but this is an important question for future models. What are Barro's main conclusions?
Section 4 examines whether it is government spending or deficits that affect interest rates. What is the prediction of the Ramsey model? What are Barro's conclusions and how do they conform to this prediction?