Government Expenditures and Unemployment: A DSGE Perspective

48 Pages Posted: 8 Jun 2016

See all articles by Eric Mayer

Eric Mayer

University of Würzburg - Institute of Economics and Social Sciences

Stephane Moyen

Deutsche Bundesbank - Research Centre

Nikolai Stahler

Deutsche Bundesbank - Economics Department

Date Written: 2010

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

JEL Classification: E32, J64, E62

Suggested Citation

Mayer, Eric and Moyen, Stephane and Stahler, Nikolai, Government Expenditures and Unemployment: A DSGE Perspective (2010). Available at SSRN: https://ssrn.com/abstract=2785382 or http://dx.doi.org/10.2139/ssrn.2785382

Eric Mayer (Contact Author)

University of Würzburg - Institute of Economics and Social Sciences ( email )

Sanderring 2
Wuerzburg, 97070
Germany

Stephane Moyen

Deutsche Bundesbank - Research Centre ( email )

Wilhelm-Epstein-Str. 14
D-60431 Frankfurt/Main
Germany

Nikolai Stahler

Deutsche Bundesbank - Economics Department ( email )

Wilhelm-Epstein-Strasse 14
60431 Frankfurt am Main
Germany

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