Working Paper: CEPR ID: DP5313
Authors: Evi Pappa
Abstract: We study the mechanics of transmission of fiscal shocks to labour markets. We characterize a set of robust implications following government consumption, investment and employment shocks in a RBC and a New-Keynesian model and use part of them to identify shocks in the data. In line with the New-Keynesian story, shocks to government consumption and investment increase real wages and employment contemporaneously both in US aggregate and in US state data. The dynamics in response to employment shocks are mixed, but in many cases are inconsistent with the predictions of the RBC model.
Keywords: Labour markets; Sign restrictions; Sticky and flexible prices; VARs
JEL Codes: C11; E12; E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government consumption and investment shocks (E20) | Real wages (J31) |
| Government consumption and investment shocks (E20) | Employment (J68) |
| Government consumption and investment shocks (E20) | Output (Y10) |
| Government consumption and investment shocks (E20) | Deficits (H62) |
| Government employment shocks (J68) | Real wages (J31) |
| Government employment shocks (J68) | Output (Y10) |
| Government employment shocks (J68) | Employment (J68) |