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Fiscal Stimulus and Labor Market Dynamics in Japan

The paper studies effects of fiscal expansion on the Japanese labor market. First, using a structural VAR model, we find that the unemployment rate falls and employment rises following an increase in government spending. We also find that fiscal expansion affects flows in and out of unemployment. While an increase in government spending increases the job-finding rate, it reduces the separation rate. We then incorporate search and matching frictions into a standard dynamic general equilibrium model, and study whether the model can explain what we observed in data. While the model fails to predict the exact size of the impact of the government spending shock on the Japanese labor market variables, it can consistently capture the empirical pattern of responses of labor market variables to the shock.

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Paper provided by Research Institute, International University of Japan in its series Working Papers with number EMS_2012_19.

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Length: 30 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:iuj:wpaper:ems_2012_19
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