Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/70621 
Year of Publication: 
2007
Series/Report no.: 
Working Paper No. 2007-3
Publisher: 
Federal Reserve Bank of Atlanta, Atlanta, GA
Abstract: 
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.
Subjects: 
war finance
McKenna rule
debt retirement
capital income tax rate
permanent income
JEL: 
E6
N4
Document Type: 
Working Paper

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