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Spending-based austerity measures and their effects on output and unemployment

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Listed author(s):
  • Bermperoglu, Dimitrios
  • Pappa, Evi
  • Vella, Eugenia

Abstract

We compare the output and unemployment effects of fiscal adjustments in different types of government outlays in the US, Canada, Japan, and the UK. We identify shocks in government consumption, investment, vacancies and government wages in a SVAR using sign restrictions extracted from a New-Keynesian model with matching frictions in the private and public sector, endogenous labor force participation and heterogeneous unemployed jobseekers. Government vacancy cuts are associated with the highest output losses and the lowest gains in terms of deficit reductions. This is because such shocks generate an additional wealth effect: they induce a fall in the number of working members of the household that leads to a fall in private consumption and investment demand. On the other hand, government wage cuts are the least destructive device for cutting the budget.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9383.

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Date of creation: Mar 2013
Handle: RePEc:cpr:ceprdp:9383
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Keywords: austerity; NK model; output and unemployment multipliers; search and matching frictions; sign restrictions; VARs;

Find related papers by JEL classification:

  • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
  • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
  • 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

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Cited by:

  1. Munkacsi, Zsuzsa, 2015. "Fiscal austerity, unemployment and family firms," Discussion Papers 06/2015, Deutsche Bundesbank, Research Centre.
  2. Eckardt, Sebastian & Mills, Zachary, 2014. "What goes up must come down -- cyclicality in public wage bill spending," Policy Research Working Paper Series 6760, The World Bank.
  3. International Monetary Fund, 2015. "Belgium; Selected Issues," IMF Staff Country Reports 15/71, International Monetary Fund.

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