Working Paper: CEPR ID: DP9383
Authors: Dimitrios Bermperoglou; Evi Pappa; Eugenia Vella
Abstract: We compare the output and unemployment effects of fiscal adjustments in different types of government outlays in the US, Canada, Japan, and the UK. We identify shocks in government consumption, investment, vacancies and government wages in a SVAR using sign restrictions extracted from a New-Keynesian model with matching frictions in the private and public sector, endogenous labor force participation and heterogeneous unemployed jobseekers. Government vacancy cuts are associated with the highest output losses and the lowest gains in terms of deficit reductions. This is because such shocks generate an additional wealth effect: they induce a fall in the number of working members of the household that leads to a fall in private consumption and investment demand. On the other hand, government wage cuts are the least destructive device for cutting the budget.
Keywords: Austerity; NK Model; Output and Unemployment Multipliers; Search and Matching Frictions; Sign Restrictions; 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 vacancy cuts (J68) | output (C67) |
| government vacancy cuts (J68) | deficit (H62) |
| government wage cuts (J38) | output (C67) |
| government wage cuts (J38) | unemployment (J64) |
| government wage cuts (J38) | deficit-to-GDP ratio (H68) |
| 1% of GDP cut in government consumption, investment, and wage bill expenditures (H69) | output (C67) |
| 1% of GDP cut in government consumption, investment, and wage bill expenditures (H69) | unemployment (J64) |
| reductions in public vacancies (J68) | falls in output and increases in unemployment (E24) |
| wage bill cuts from public wages (J38) | expansionary effects (F41) |