Fiscal Expansions Affect Unemployment, But They May Increase it
47 Pages Posted: 5 Apr 2010
Date Written: March 2010
Evidence from structural VARs suggests that the unemployment rate significantly increases following increases in government expenditures in many OECD countries. Results hold for a variety of specifications and identification schemes. Fiscal expansions also tend to increase the participation rate, vacancies, real wages and employment while they do not affect significantly labor market tightness. Existing models have difficulties in generating such responses. We introduce insider and outsider workers and a labor force participation choice into a New Keynesian model with matching frictions and show that calibrated versions of the model can generate the empirical regularities.
Keywords: insiders-outsiders, matching frictions, participation rate, SVAR, unemployment
JEL Classification: E32, E62
Suggested Citation: Suggested Citation