Optimal Government Spending and Unemployment

Tinbergen Institute Discussion Paper No. TI 2008-024/2

38 Pages Posted: 25 Mar 2008

See all articles by Andreas Schabert

Andreas Schabert

University of Cologne - Department of Economics; University of Dortmund; University of Amsterdam - Faculty of Economics and Business

Ludger Linnemann

University of Dortmund

Date Written: March 2008

Abstract

We study optimal government spending in a business cycle model with frictional unemployment. The Ramsey optimal policy is contrasted with a reference policy which would be first best in a frictionless economy. Results are: the Ramsey policy i) implies a higher steady state ratio of government spending to private consumption than the reference policy; ii) is procyclical under technology shocks and countercyclical under demand shocks (while the public spending ratio to private consumption is always countercyclical); iii) stabilizes employment, in some cases even at the cost of higher consumption volatility; iv) is qualitatively unaltered in a sticky price version with jointly optimal monetary and fiscal policy.

Keywords: Optimal fiscal policy, government spending, labor market frictions, unemployment, stabilization policy

JEL Classification: E62, E32

Suggested Citation

Schabert, Andreas and Linnemann, Ludger, Optimal Government Spending and Unemployment (March 2008). Available at SSRN: https://ssrn.com/abstract=1113033 or http://dx.doi.org/10.2139/ssrn.1113033

Andreas Schabert (Contact Author)

University of Cologne - Department of Economics ( email )

Cologne, 50923
Germany

University of Dortmund ( email )

Vogelpothsweg 87
Dortmund, 44227
Germany
+49 231 755 3288 (Phone)

University of Amsterdam - Faculty of Economics and Business ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Ludger Linnemann

University of Dortmund ( email )

Department of Economics
Dortmund, D-44221
Germany

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