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A Fiscal Stimulus and Jobless Recovery

  • Cristiano Cantore

    (University of Surrey)

  • Paul Levine

    (University of Surrey)

  • Giovanni Melina

    (University of Surrey)

We analyse the effects of a government spending expansion in a dynamic stochastic general equilibrium (DSGE) model with Mortensen-Pissarides labour market frictions, deep habits and a constant-elasticity-of-substitution (CES) production function. The combination of deep habits and CES technology is crucial. The presence of deep habits enables the model to deliver output and unemployment multipliers in the high range of recent empirical estimates, while an elasticity of substitution between capital and labour in the range of available estimates allows it to produce a scenario compatible with the observed jobless recovery. An accommodative monetary policy with respect to the output gap alongside sticky prices plays an important role for the stabilisation properties of the fiscal stimulus.

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Paper provided by School of Economics, University of Surrey in its series School of Economics Discussion Papers with number 1111.

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Length: 41 pages
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:sur:surrec:1111
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