Assessing The Effects of Public Expenditure Shocks on the Labor Market in the Euro-Area

The core of the paper is a medium-scale DSGE model calibrated for the Euro-Area with a detailed fiscal sector including both public consumption and public investment. The financing of the spending can be tax-based or debt-based. In the case of a debt-funded expenditure expansion, I find strong negative multipliers on the unemployment rate for the public consumption shock, around -0.6% at the peak, and more ambiguous results for a public investment shock. In both cases, the effects on the unemployment rate are short-lasting. With a sensitivity analysis exercice, it is shown than the parameters included in households’ preferences do not drammatically change the results in the case of the public consumption shock but the results are very sensitive to these parameters for the public investment shock. Finally, with the introduction of some distortive taxes and assuming that they fund the half of the deficit engendered by public spending expansion, I show that the multipliers little vary little even if the cumulated unemployment fiscal multiplier can become significantly positive with a raise of public investment.