New Keynesian or RBC Transmission? The Effects of Fiscal Policy in Labor Markets
IGIER Working Paper No. 293
35 Pages Posted: 18 Dec 2005
Date Written: July 2004
We study the mechanics of transmission of fiscal shocks to labor markets. We characterize a set of robust implications following government consumption, investment and employment shocks in a RBC and a New-Keynesian model and use part of them to identify shocks in the data. In line with the New-Keynesian story, shocks to government consumption and investment increase real wages and employment contemporaneously both in US aggregate and in US state data. The dynamics in response to employment shocks are mixed, but in many cases are inconsistent with the predictions of the RBC model.
Keywords: sticky and flexible prices, labor markets, sign-restrictions, VARs
JEL Classification: C11, E12, E32, E62
Suggested Citation: Suggested Citation