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Assessing The Effects of Public Expenditure Shocks on the Labor Market in the Euro-Area

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  • Thierry Betti

Abstract

The core of the paper is a medium-scale DSGE model calibrated for the Euro-Area with a detailed fiscal sector including both public consumption and public investment. The financing of the spending can be tax-based or debt-based. In the case of a debt-funded expenditure expansion, I find strong negative multipliers on the unemployment rate for the public consumption shock, around -0.6% at the peak, and more ambiguous results for a public investment shock. In both cases, the effects on the unemployment rate are short-lasting. With a sensitivity analysis exercice, it is shown than the parameters included in households’ preferences do not drammatically change the results in the case of the public consumption shock but the results are very sensitive to these parameters for the public investment shock. Finally, with the introduction of some distortive taxes and assuming that they fund the half of the deficit engendered by public spending expansion, I show that the multipliers little vary little even if the cumulated unemployment fiscal multiplier can become significantly positive with a raise of public investment.

Suggested Citation

  • Thierry Betti, 2014. "Assessing The Effects of Public Expenditure Shocks on the Labor Market in the Euro-Area," Working Papers of BETA 2014-21, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
  • Handle: RePEc:ulp:sbbeta:2014-21
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    File URL: http://www.beta-umr7522.fr/productions/publications/2014/2014-21.pdf
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    References listed on IDEAS

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    Cited by:

    1. Amélie BARBIER-GAUCHARD & Thierry BETTI & Giuseppe DIANA, 2015. "Spillover effects in a monetary union: Why fiscal policy instruments matter," Working Papers of LaRGE Research Center 2015-01, Laboratoire de Recherche en Gestion et Economie (LaRGE), Université de Strasbourg.

    More about this item

    Keywords

    Fiscal multipliers; labor market; DSGE models; preferences; unemployment.;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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