Budgetary Policy and Unemployment Dynamics

Leopold von Thadden and Leo Kaas

No 2001,07, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

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 policy dampens them. However, the latter policy strengthens unemployment 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.

Keywords: Unemployment; Overlapping generations; Public debt (search for similar items in EconPapers)
JEL-codes: E24 E62 H62 (search for similar items in EconPapers)
Date: 2001
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Related works:
Working Paper: Budgetary Policy and Unemployment Dynamics (2002)
Working Paper: Budgetary Policy and Unemployment Dynamics (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bubdp1:4153

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