The Dynamic Effects of Government Spending Shocks on Employment and Work Hours
Federal Reserve Bank of Richmond WP No. 98-9
46 Pages Posted: 1 Jul 1999
Date Written: August 1998
In this paper, we analyze the dynamic behavior of employment and hours worked per worker in a stochastic general equilibrium model with a matching mechanism between vacancies and unemployed workers. The model is estimated for the U.S. using the Generalized Methods of Moments (GMM) estimation technique. An increase in government spending raises hours worked per worker and crowds out private consumption due to a negative wealth effect. On the path converging towards the steady state, private consumption is below its long run average and increases, which implies that the interest rate is above its long run average and increases. The interest rate effect dominated the pure economic rent effect on the capital value of a hired worker to the firm, causing a reduction of job openings and consequently a decrease in employment. These results are contrasted with the predictions of a version of Burnside, Eichenbaum and Rebels?s (1993) labor hoarding model.
JEL Classification: E24, E62, E32, J64
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