The Effects of Fiscal Shocks on Employment and the Real Wage
affiliation not provided to SSRN
International Economic Review, Vol. 50, Issue 1, pp. 217-244, February 2009
We study the transmission of fiscal shocks in the labor market. We employ a structural VAR and base identification on the restrictions that shocks to government consumption, investment, and employment must raise output and deficits. These restrictions hold in both prototype Real Business Cycle (RBC) and New Keynesian models. Shocks to government consumption and investment increase real wages and employment contemporaneously, both at state level and in the aggregate. The dynamics in response to employment shocks are mixed: Increases in government employment raise the real wage and total employment in the aggregate. However, in one third of the states they reduce total employment.
Number of Pages in PDF File: 28Accepted Paper Series
Date posted: January 29, 2009
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