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Impacts of Government Spending on Unemployment: Evidence from a Medium-scale DSGE Model(in Japanese)

Tatsuyoshi Matsumae and Ryo Hasumi

ESRI Discussion paper series from Economic and Social Research Institute (ESRI)

Abstract: Can fiscal stimulus improve unemployment? If so, to what extent does an increase in government spending improve unemployment? These answers are still ambiguous since opposite empirical evidences are shown (for instance, Monacelli et al. 2010, and Bruckner and Pappa 2012). This paper examines the effect of government spending on unemployment in the Japanese economy, introducing unemployment in a fashion of Gali et al. (2012) into a medium-scale DSGE model with the effect of government consumption to stimulate private consumption and the effect of government investment to improve temporarily productivity of private firms through the accumulation of public capital. Our study shows that both government consumption and investment improve unemployment and the channel of reducing unemployment is mainly attributed to the traditional effect through an increase in aggregate demand. On the other hand, the effect of government consumption to induce private consumption is small. We also find the temporal effect of government investment to the productivity of private firms raises real wage but does not have much influence on unemployment variations. It should be noted that our results might come from modeling unemployment based on the market power of workers. Finally, our results are robust whether the estimation period includes or excludes zero interest rate periods.

Keywords: Fiscal Policy; Unemployment; DSGE Model JEL Classification Numbers: E6; E2; H3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge and nep-pke
Date: 2016-03
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