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Government Deficit Shocks and Okun's Coefficient Volatility: New Insights on the Austerity versus Growth Debate

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  • Pham, Binh Thai

    (University of Economics Ho Chi Minh City)

  • Sala, Hector

    (Universitat Autònoma de Barcelona)

Abstract

This paper connects two salient economic features: (i) Fiscal shocks have asymmetric effects across business cycle phases (Gechert et al., 2019); (ii) Okun's coefficient is time varying and may be unstable. The intertwined dynamic behavior of fiscal shocks and unemployment-output trade-offs are studied in this paper using state-of-the-art TVP-VAR modelling techniques applied to the analysis of six selected economies: France, Japan, Spain, Sweden, the United Kingdom (UK), and the Unites States of America (USA). We confirm the heterogeneity of Okun's coefficient across country, and its time-varying nature across time, showing in addition its fluctuation around a reference long-run value. We document a significant short-run impact of fiscal shocks on Okun's trade-off which, based on the experience of the Global Financial Crisis, becomes larger in periods of economic turmoil. Okun's coefficient is most volatile in Spain and most stable in Sweden and Japan, with France, UK and USA in between. Policy wise, we claim that austerity policies may have unexpected adverse effects on job creation if implemented during slumps, precisely when the labor market sensitivity with respect to the performance of the product market is likely to be more acute.

Suggested Citation

  • Pham, Binh Thai & Sala, Hector, 2019. "Government Deficit Shocks and Okun's Coefficient Volatility: New Insights on the Austerity versus Growth Debate," IZA Discussion Papers 12492, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp12492
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    References listed on IDEAS

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    Cited by:

    1. Patrick M. Crowley & David Hudgins, 2021. "Okun’s law revisited in the time–frequency domain: introducing unemployment into a wavelet-based control model," Empirical Economics, Springer, vol. 61(5), pages 2635-2662, November.
    2. Binh Thai Pham & Hector Sala, 2022. "Cross-country connectedness in inflation and unemployment: measurement and macroeconomic consequences," Empirical Economics, Springer, vol. 62(3), pages 1123-1146, March.

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    More about this item

    Keywords

    fiscal shocks; Okun's coefficient; business cycle; austerity; TVP-VAR;
    All these keywords.

    JEL classification:

    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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