Spending-Based Austerity Measures and Their Effects on Output and Unemployment

56 Pages Posted: 12 Mar 2013

See all articles by Dimitrios Bermperoglou

Dimitrios Bermperoglou

University of Lausanne, Department of Economics

Evi Pappa

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

Eugenia Vella

Athens University of Economics and Business

Date Written: March 2013

Abstract

We compare the output and unemployment effects of fiscal adjustments in different types of government outlays in the US, Canada, Japan, and the UK. We identify shocks in government consumption, investment, vacancies and government wages in a SVAR using sign restrictions extracted from a New-Keynesian model with matching frictions in the private and public sector, endogenous labor force participation and heterogeneous unemployed jobseekers. Government vacancy cuts are associated with the highest output losses and the lowest gains in terms of deficit reductions. This is because such shocks generate an additional wealth effect: they induce a fall in the number of working members of the household that leads to a fall in private consumption and investment demand. On the other hand, government wage cuts are the least destructive device for cutting the budget.

Keywords: austerity, NK model, output and unemployment multipliers, search and matching frictions, sign restrictions, VARs

JEL Classification: C11, E12, E32, E62

Suggested Citation

Bermperoglou, Dimitrios and Pappa, Paraskevi (Evi) and Vella, Eugenia, Spending-Based Austerity Measures and Their Effects on Output and Unemployment (March 2013). CEPR Discussion Paper No. DP9383, Available at SSRN: https://ssrn.com/abstract=2231874

Dimitrios Bermperoglou (Contact Author)

University of Lausanne, Department of Economics ( email )

UNIL Dorigny
Batiment Internef
Lausanne, 1015
Switzerland

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

Eugenia Vella

Athens University of Economics and Business ( email )

No Address Available

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