Budgetary Policy and Unemployment Dynamics

Leo Kaas and Leopold von Thadden ()

Vienna Economics Papers from University of Vienna, Department of Economics

Abstract: We consider a dynamic general equilibrium model with collective wage bargaining and investigate how unemployment dynamics are affected by two types of budgetary policies. In line with traditional reasoning, a balanced-budget rule amplifies fluctuations in the short run, whereas an unbalanced-budget persistence by its adverse impact on growth, and may even destabilize the adjustment path. If this is the case, a future fiscal consolidation is needed which further raises unemployment. These results are consistent with empirical evidence on a positive cross-country relationship between government borrowing and unemployment persistence.

JEL-codes: E24 E62 H62 (search for similar items in EconPapers)
Date: 2001-03
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Working Paper: Budgetary Policy and Unemployment Dynamics (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:vie:viennp:vie0104

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