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Fiscal Policy in a Business Cycle Model with Endogenous Productivity

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  • Dennis Wesselbaum

    (University of Otago, Department of Economics)

Abstract

This paper shows that transitory demand-side fiscal policy shocks can have long-run effects. We develop a Real Business Cycle model with search and matching frictions and introduce an endogenous growth channel driven by total hours worked. We estimate the model using Bayesian methods on data for the United States. The model with the endogenous growth link generates a better fit to the data than the model without the link. Further, we find evidence for cleansing effects of recessions. Therefore, transitory demand-side shocks will have long-run effects. We stress the policy relevance of endogenous productivity in recessions and for the effects of austerity programs.

Suggested Citation

  • Dennis Wesselbaum, 2018. "Fiscal Policy in a Business Cycle Model with Endogenous Productivity," Annals of Economics and Finance, Society for AEF, vol. 19(1), pages 103-135, May.
    • Handle: RePEc:cuf:journl:y:2018:v:19:i:1:wesselbaum
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • 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
    • J63 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Turnover; Vacancies; Layoffs
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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