The Dynamic Effects of Government Spending Shocks on Employment and Work Hours

47 Pages Posted: 21 Nov 2012

See all articles by Mingwei Yuan

Mingwei Yuan

Bank of Canada - Department of Monetary and Financial Analysis

Wenli Li

Federal Reserve Bank of Philadelphia

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 1998

Abstract

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 declines. The interest rate effect dominates 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 Rebelo's (1993) labor hoarding model.

Keywords: Employment, Hours, Government Spending, Job Search

JEL Classification: E24, E62, E32, J64

Suggested Citation

Yuan, Mingwei and Li, Wenli, The Dynamic Effects of Government Spending Shocks on Employment and Work Hours (August 1, 1998). FRB Richmond Working Paper No. 98-9. Available at SSRN: https://ssrn.com/abstract=2123688 or http://dx.doi.org/10.2139/ssrn.2123688

Mingwei Yuan

Bank of Canada - Department of Monetary and Financial Analysis ( email )

234 Wellington St.
Ottawa, Ontario K1A 0G9
Canada

Wenli Li (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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