A Fiscal Stimulus and Jobless Recovery
January 18, 2013
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Summary
We analyse the effects of a government spending expansion in a DSGE model with Mortensen-Pissarides labour market frictions, deep habits in private and public consumption, investment adjustment costs, a constant-elasticity-of-substitution (CES) production function, and adjustments in employment both at the intensive as well as the extensive margin. The combination of deep habits and CES technology is crucial. The presence of deep habits magnifies the responses of macroeconomic variables to a fiscal stimulus, while an elasticity of substitution between capital and labour in the range of available estimates allows the model to produce a scenario compatible with the observed jobless recovery.
Subject: Consumption, Expenditure, Fiscal policy, Fiscal stimulus, Labor, National accounts, Unemployment
Keywords: CES production function, CES technology, Consumption, deep habits, depreciation rate, fiscal policy, Fiscal stimulus, government spending, government spending expansion, jobless recovery, labor market search-match frictions, unemployment, unemployment multiplier, WP
Pages:
53
Volume:
2013
DOI:
Issue:
017
Series:
Working Paper No. 2013/017
Stock No:
WPIEA2013017
ISBN:
9781475595338
ISSN:
1018-5941
