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A Fiscal Stimulus and Jobless Recovery

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  • Cristiano Cantore
  • Paul Levine
  • Giovanni Melina

Abstract

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.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/17.

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Length: 53
Date of creation: 18 Jan 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/17

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Keywords: Unemployment; Fiscal policy; Government expenditures; Business cycles; Economic models; deep habits; labor market search-match frictions; CES production function; government spending; jobless; fiscal stimulus; output multiplier; unemployment rate; recession; job creation; fiscal multipliers; fiscal expansion; fiscal shocks; unemployed; equilibrium unemployment; budget constraint; rate of unemployment; taxation; unemployment benefit; beveridge; unemployment benefits; aggregate demand; government spending shocks; beveridge curve; public spending; fiscal expansions; natural rate of unemployment; tax rates; local government spending; discretionary fiscal policy; government budget; number of employees; employment fluctuations; incidence of unemployment; full employment; fiscal measure; government budget constraint; employment relationship; unemployed workers; unemployment increases; aggregate employment; government spending multipliers; fiscal rules;

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References

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Cited by:
  1. Bartosz Godziszewski & Michal Kruszka, 2013. "Stability of Banking System in Poland and Activity of the KNF – Polish Financial Supervision Authority," CESifo Forum, Ifo Institute for Economic Research at the University of Munich, vol. 14(1), pages 29-34, 05.
  2. Giovanni Melina & Stefania Villa, 2011. "Fiscal Policy and Lending Relationships," Birkbeck Working Papers in Economics and Finance 1103, Birkbeck, Department of Economics, Mathematics & Statistics.
  3. Punnoose Jacob, 2013. "Deep habits, price rigidities and the consumption response to Government spending," Reserve Bank of New Zealand Discussion Paper Series DP2013/03, Reserve Bank of New Zealand.

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