A Fiscal Stimulus and Jobless Recovery

33 Pages Posted: 13 Jun 2014

See all articles by Cristiano Cantore

Cristiano Cantore

University of Surrey; Bank of England

Paul Levine

School of Economics, University of Surrey

Giovanni Melina

International Monetary Fund (IMF)

Multiple version iconThere are 2 versions of this paper

Date Written: July 2014

Abstract

We analyze the effects of a government‐spending expansion in a dynamic stochastic general equilibrium model with Mortensen–Pissarides labor‐market frictions, deep habits in private and public consumption, investment adjustment costs, a constant elasticity of substitution (CES) production function, and adjustments in employment at both intensive and extensive margins. 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 labor in the range of available estimates allows the model to produce a scenario compatible with the observed jobless recovery.

Keywords: CES production function, deep habits, fiscal policy, labor‐market search‐match frictions, unemployment

JEL Classification: E24, E62

Suggested Citation

Cantore, Cristiano and Levine, Paul L. and Melina, Giovanni, A Fiscal Stimulus and Jobless Recovery (July 2014). The Scandinavian Journal of Economics, Vol. 116, Issue 3, pp. 669-701, 2014. Available at SSRN: https://ssrn.com/abstract=2450353 or http://dx.doi.org/10.1111/sjoe.12066

Cristiano Cantore (Contact Author)

University of Surrey ( email )

Guildford
Guildford, Surrey GU2 5XH
United Kingdom

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Paul L. Levine

School of Economics, University of Surrey ( email )

Guildford
Surrey GU2 7XH
United Kingdom
+44 1483 259 380 Ext. 2773 (Phone)
+44 1483 259 548 (Fax)

Giovanni Melina

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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