Fiscal Expansions Affect Unemployment, But They May Increase it

47 Pages Posted: 5 Apr 2010

See all articles by Markus Bruckner

Markus Bruckner

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Evi Pappa

London School of Economics & Political Science (LSE); Autonomous University of Barcelona - Department of Economics and Economic History

Date Written: March 2010

Abstract

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

Bruckner, Markus and Pappa, Paraskevi (Evi), Fiscal Expansions Affect Unemployment, But They May Increase it (March 2010). CEPR Discussion Paper No. DP7766, Available at SSRN: https://ssrn.com/abstract=1583264

Markus Bruckner (Contact Author)

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain

Paraskevi (Evi) Pappa

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7584 (Phone)
+44 20 7831 1840 (Fax)

Autonomous University of Barcelona - Department of Economics and Economic History ( email )

Edifici B - Campus Bellaterra
Barcelona, 08193
Spain

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