Working Paper: CEPR ID: DP7766
Authors: Markus Brckner; Evi Pappa
Abstract: Evidence from structural VARs suggests that the unemployment rate significantly increases following increases in government expenditures in many OECD countries. Results hold for a variety of specifications and identification schemes. Fiscal expansions also tend to increase the participation rate, vacancies, real wages and employment while they do not affect significantly labor market tightness. Existing models have difficulties in generating such responses. We introduce insider and outsider workers and a labor force participation choice into a New Keynesian model with matching frictions and show that calibrated versions of the model can generate the empirical regularities.
Keywords: fiscal policy; unemployment; government spending; structural VAR; labor market
JEL Codes: E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government expenditures (H59) | unemployment (J64) |
| government expenditures (H59) | participation rates (J22) |
| government expenditures (H59) | vacancies (J63) |
| government expenditures (H59) | real wages (J31) |
| government expenditures (H59) | employment (J68) |
| government expenditures (H59) | labor market tightness (J20) |