Fiscal Stimulus with Learning-by-Doing

59 Pages Posted: 28 Jun 2018 Last revised: 21 Feb 2019

See all articles by Antonello dAlessandro

Antonello dAlessandro

Bank of Italy

Giulio Fella

Queen Mary, University of London

Leonardo Melosi

Federal Reserve Bank of Chicago

Date Written: 2018-05-01

Abstract

Using a Bayesian SVAR analysis, we document that an increase in government purchases raises private consumption, the real wage and total factor productivity (TFP) while reducing inflation. Each of these facts is hard to reconcile with both neoclassical and New-Keynesian models. We extend a standard New-Keynesian model to allow for skill accumulation through past work experience, following Chang, Gomes and Schorfheide (2002). An increase in government spending increases hours and induces skill accumulation and higher measured TFP and real wages in subsequent periods. Future marginal costs fall lowering future expected inflation and, through the monetary policy rule, the real interest rate. Consumption increases as a result.

Keywords: Fiscal policy transmission, consumption, real wage

JEL Classification: E62, E63

Suggested Citation

dAlessandro, Antonello and Fella, Giulio and Melosi, Leonardo, Fiscal Stimulus with Learning-by-Doing (2018-05-01). FRB of Chicago Working Paper No. WP-2018-9. Available at SSRN: https://ssrn.com/abstract=3203588 or http://dx.doi.org/10.21033/wp-2018-09

Antonello DAlessandro (Contact Author)

Bank of Italy

Via Nazionale 91
Rome, 00184
Italy

Giulio Fella

Queen Mary, University of London ( email )

Mile End Road
London E1 4NS, London E1 4NS
United Kingdom

Leonardo Melosi

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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