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Budgetary Policy and Unemployment Dynamics

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  • Kaas, Leo

    (University of Vienna)

  • Leopold von Thadden

    (Deutsche Bundesbank Frankfurt)

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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.

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Bibliographic Info

Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2002 with number 108.

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Date of creation: 29 Aug 2002
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Handle: RePEc:ecj:ac2002:108

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Cited by:
  1. Leo Kaas & Leopold von Thadden, 2001. "Unemployment, Factor Substitution, and Capital Formation," Vienna Economics Papers 0102, University of Vienna, Department of Economics.

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