A Fiscal Stimulus and Jobless Recovery

Author/Editor:

Cristiano Cantore ; Paul L Levine ; Giovanni Melina

Publication Date:

January 18, 2013

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

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.

Series:

Working Paper No. 2013/017

Subject:

Consumption Expenditure Fiscal policy Fiscal stimulus Labor National accounts Unemployment

English

Publication Date:

January 18, 2013

ISBN/ISSN:

9781475595338/1018-5941

Stock No:

WPIEA2013017

Pages:

53

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