Optimal Government Spending and Unemployment

Ludger Linnemann () and Andreas Schabert
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Ludger Linnemann: University of Bonn

No 08-024/2, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We study optimal government spending in a business cycle model with frictional unemployment. The Ramsey optimal policy is contrasted with a reference policy which would be first best in a frictionless economy. Results are: the Ramsey policy i) implies a higher steady state ratio of government spending to private consumption than the reference policy; ii) is procyclical under technology shocks and countercyclical under demand shocks (while the public spending ratio to private consumption is always countercyclical); iii) stabilizes employment, in some cases even at the cost of higher consumption volatility; iv) is qualitatively unaltered in a sticky price version with jointly optimal monetary and fiscal policy.

Keywords: Optimal fiscal policy; government spending; labor market frictions; unemployment; stabilization policy (search for similar items in EconPapers)
JEL-codes: E32 E62 (search for similar items in EconPapers)
Date: 2008-03-06
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20080024

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