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A Fiscal Stimulus and Jobless Recovery

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  • Cristiano Cantore

    (University of Surrey)

  • Paul Levine

    (University of Surrey)

  • Giovanni Melina

    (University of Surrey)

Abstract

We analyse the effects of a government spending expansion in a dynamic stochastic general equilibrium (DSGE) model with Mortensen-Pissarides labour market frictions, deep habits and a constant-elasticity-of-substitution (CES) production function. The combination of deep habits and CES technology is crucial. The presence of deep habits enables the model to deliver output and unemployment multipliers in the high range of recent empirical estimates, while an elasticity of substitution between capital and labour in the range of available estimates allows it to produce a scenario compatible with the observed jobless recovery. An accommodative monetary policy with respect to the output gap alongside sticky prices plays an important role for the stabilisation properties of the fiscal stimulus.

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Bibliographic Info

Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 1111.

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Length: 41 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:sur:surrec:1111

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Web page: http://www.surrey.ac.uk/economics/
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Keywords: Fiscal policy; deep habits; labour market search-match frictions; unemployment; CES production function;

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References

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Cited by:
  1. 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.
  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. 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.

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