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Fiscal Stimulus in an Endogenous Job Separation Model

This paper re-visits effects of fiscal expansion on employment and unemployment by focusing on both hiring and firing margins. We develop a dynamic stochastic general equilibrium model with labor search frictions in which job separation is endogenously determined. We study effects of fiscal stimuli in the form of government spending and hiring subsidies. The prediction of our model is in contrast with earlier studies that assume exogenous job separation. First, our model generates a larger size of the impact of a government spending shock on labor market variables than the model without endogenous separation. Second, while an increase in hiring subsidies increases employment and reduces unemployment in the model without endogenous separation, it reduces employment and increases unemployment in our model.

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File URL: http://www.iuj.ac.jp/workingpapers/index.cfm?File=EMS_2013_02.pdf
File Function: First version, 2013
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Paper provided by Research Institute, International University of Japan in its series Working Papers with number EMS_2013_02.

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Length: 28 pages
Date of creation: Jan 2013
Date of revision:
Handle: RePEc:iuj:wpaper:ems_2013_02
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  12. Monacelli, Tommaso & Perotti, Roberto & Trigari, Antonella, 2010. "Unemployment fiscal multipliers," Journal of Monetary Economics, Elsevier, vol. 57(5), pages 531-553, July.
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  18. Hosios, Arthur J, 1990. "On the Efficiency of Matching and Related Models of Search and Unemployment," Review of Economic Studies, Wiley Blackwell, vol. 57(2), pages 279-98, April.
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  23. Yuan, Mingwei & Li, Wenli, 2000. "Dynamic employment and hours effects of government spending shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 24(8), pages 1233-1263, July.
  24. Harald Uhlig, 2010. "Some Fiscal Calculus," American Economic Review, American Economic Association, vol. 100(2), pages 30-34, May.
  25. Markus Brückner & Evi Pappa, 2012. "Fiscal Expansions, Unemployment, And Labor Force Participation: Theory And Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 53(4), pages 1205-1228, November.
  26. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, June.
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