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Budgetary Policy and Unemployment Dynamics

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  • von Thadden, Leopold
  • Kaas, Leo

Abstract

We consider a dynamic general equilibrium model with collective wage bargaining and investigate how unemployment dynamics are affected by two types of budgetary policies. In line with traditional reasoning, a balanced-budget rule amplifies fluctuations in the short run, whereas an unbalanced-budget policy dampens them. However, the latter policy strengthens unemployment persistence by its adverse impact on growth, and may even destabilize the adjustment path. If this is the case, a future fiscal consolidation is needed which further raises unemployment. These results are consistent with empirical evidence on a positive cross-country relationship between government borrowing and unemployment persistence.

Suggested Citation

  • von Thadden, Leopold & Kaas, Leo, 2001. "Budgetary Policy and Unemployment Dynamics," Discussion Paper Series 1: Economic Studies 2001,07, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdp1:4153
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    1. repec:bla:germec:v:4:y:2003:i::p:475-495 is not listed on IDEAS

    More about this item

    Keywords

    Unemployment; Overlapping generations; Public debt;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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