A Fiscal Stimulus and Jobless Recovery
54 Pages Posted: 22 Feb 2013
Date Written: January 2013
We analyse the effects of a government spending expansion in a DSGE model with Mortensen-Pissarides labour market frictions, deep habits in private and public consumption, investment adjustment costs, a constant-elasticity-of-substitution (CES) production function, and adjustments in employment both at the intensive as well as the extensive margin. The combination of deep habits and CES technology is crucial. The presence of deep habits magnifies the responses of macroeconomic variables to a fiscal stimulus, while an elasticity of substitution between capital and labour in the range of available estimates allows the model to produce a scenario compatible with the observed jobless recovery.
Keywords: Business cycles, CES production function, Economic models, Fiscal policy, Government expenditures, Unemployment, deep habits, fiscal policy, labor market search-match frictions, unemployment
JEL Classification: E24, E62
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