Government expenditures and unemployment: A DSGE perspective

Eric Mayer, Stéphane Moyen and Nikolai Stähler

No 2010,18, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

Abstract: In a New Keynesian DSGE model with labor market frictions and liquidity-constrained consumers aggregate unemployment is likely to increase due to a non-persistent government spending shock. Furthermore, the group of asset-holding households reacts very differently from the group of liquidity-constrained consumers implying that the unemployment rate is likely to decrease for asset-holding households, while it increases among liquidity-constrained consumers. The main driver of our results is the marginal utility of consumption which moves in opposite directions for the two types. Regarding the model's parameters, we find that the size of the fiscal (unemployment) multiplier increases with i) highly sticky prices, ii) high degrees of risk aversion, iii) low convexity in labor disutility iv) high replacement rates, and v) debt-financed expenditures.

Keywords: Search and matching; government spending shocks; unemployment (search for similar items in EconPapers)
JEL-codes: E32 E62 J64 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp1:201018

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